Is Nvidia stock simply too expensive?

Nvidia stock’s experienced a meteoric rise over the past 12 months, but might this AI-engendered propulsion have gone too far?

| More on:

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Nvidia (NASDAQ:NVDA) stock’s expensive. And I don’t mean it’s expensive because it’s been trading at 67.7 times earnings for the last 12 months. A single share’s now worth $860. That means not everyone can afford to own it. It might sound trivial, but it’s something worth considering. I’m building a portfolio for my five-month-old daughter with £200 a month. She can’t afford Nvidia.

As a side note, I don’t expect it to introduce a more modestly-priced share option. After all, there are more expensive stocks out there. However, it’s interesting to note that it’s happened before. In 1996, Berkshire Hathaway introduce its Class B stock — the Class A shares are now worth $608k each.

So back to Nvidia. It might be a little pricey from a practical perspective, but is the stock overvalued? Let’s take a closer look.

Understanding valuations

There are plenty of ways to value a stock. UK-focused investors are probably quite familiar with the price-to-earnings (P/E) ratio and the dividend yield. However, when we’re looking at growth-focused stocks — and there aren’t too many of them on the FTSE 100 — it’s necessary to look, understandably, more closely at growth.

As such, we need to look at forecasts. These give us an idea of a company’s trajectory. And we can use them to establish whether a business is going to look cheaper in the future.

Moving forward, analysts expect Nvidia’s earnings per share to grow at 34.78% over the next three-to-five years. That’s exceptional growth, but it means we need to look beyond past earnings multiples. Looking at 2024, we can see Nvidia’s trading at 35.59 times forecasted earnings.

And this leads me to the price-to-earnings-to-growth (PEG) ratio. It’s calculated by dividing the forward P/E ratio (35.59) by the average annual growth rate for the medium term (34.78%). As such, Nvidia has a PEG ratio of 1.02.

Traditionally, a PEG ratio under one suggests a company’s undervalued. However, in the current market, it’s not easy to find companies with ratios under one. In fact, Nvidia is the only member of the ‘Magnificent Seven’ to have a PEG ratio anywhere near one. It’s also industry-specific. For 2027, Nvidia’s expected to trade around 20 times earnings. That’s not expensive for tech, by current standards.

As such, I don’t think Nvidia’s overvalued. Personally, I think it’s still got some way to go, but obviously it’s not as cheap as it once was.

The leader, but for how long?

Nvidia’s chipsets are central to the revolution in artificial intelligence (AI). Originally designed for gaming, the company’s graphics processing units (GPUs) also possess parallel capacity that’s perfectly suited to AI workloads.

Other companies, notably Intel, are after its crown. And while competition’s a risk for investors in the long run, it seems unlikely any other company will match it in the medium term. The Santa Clara-based firm has already built on the success of the H100 chipset with the H200.

The H200 is thought to offer between 1.4-1.9 times faster large language model inference compared to the H100. And Nvidia certainly has the resources to build its lead further. Free cash flow also amounted to a staggering $11.2bn in the final quarter of fiscal 2024.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Fox has positions in Nvidia. The Motley Fool UK has recommended Nvidia. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Is this FTSE 100 stalwart the perfect buy for my Stocks and Shares ISA?

As Shell considers leaving London for a New York listing. Stephen Wright wonders whether there’s an undervalued opportunity for his…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

3 things I’d do now to start buying shares

Christopher Ruane explains three steps he'd take to start buying shares for the very first time, if he'd never invested…

Read more »

Investing Articles

Investing £300 a month in FTSE shares could bag me £1,046 monthly passive income

Sumayya Mansoor explains how she’s looking to create an additional income stream through dividend-paying FTSE stocks to build wealth.

Read more »

Investing Articles

£10K to invest? Here’s how I’d turn that into £4,404 annual passive income

This Fool explains how using a £10K lump sum can turn into a passive income stream worth thousands for her…

Read more »

Investing Articles

1 magnificent FTSE 100 stock investors should consider buying

This Fool explains why this FTSE 100 stock is one for investors to seriously consider with its amazing brand power…

Read more »

Rainbow foil balloon of the number two on pink background
Investing For Beginners

2 under-the-radar FTSE 100 stocks under £2

Jon Smith identifies two FTSE 100 stocks that he believes are getting a lack of attention from some investors but…

Read more »

Investing Articles

£8,000 in savings? I’d use it as a start to aim for £30k a year in passive income

Here's how regular investing in the UK stock market, over the long term, could help us build up some nice…

Read more »

Photo of a man going through financial problems
Investing Articles

Down 16% in a month! Can this FTSE 100 stock recover in April?

Grabbing low-priced shares with long-term growth potential is an investor's dream. I think this FTSE 100 share may be an…

Read more »