A lot of investors consider Nvidia (NASDAQ:NVDA) stock to be one of the hottest portfolio choices at the moment. However, others are concerned about the company’s valuation. My opinion is that even after gaining more than 17,500% in 10 years, it can still grow in price a lot more from here.
Why I love Nvidia
In my research for this article, I watched an interview with Nvidia’s CEO Jensen Huang on CNBC. In the interview, he mentioned how he attributes his success with Nvidia somewhat to the fact that he keeps the company agile. He means that the firm is willing to adapt to changing market conditions, including capitalising on opportunities and avoiding threats.
Artificial intelligence wasn’t Nvidia’s starting point. It had much more experience in gaming, advanced visual representations, and other forms of high computational power. This translated well into AI operations later. When the next technology shift happens, Nvidia should be prepared for this and scale up its operations accordingly.
Is the valuation really troubling?
Investors who are concerned about Nvidia’s valuation have a reason to be. Traditional value investors look for companies that are trading below the company’s intrinsic worth estimated by forecasted cash flows. However, in the technology industry, it’s very common for companies to trade at a lot higher than this estimate for extended periods of time, and in the case of big tech, for many decades.
Therefore, I don’t think it’s really risky to invest in technology companies like Nvidia that are considered overvalued by traditional measures. The real question is, what does the investing public deem a fair price over the long term? And then, even more important is how likely the firm is to keep on growing and what the business strategy looks like.
Leading analysts expect Nvidia’s growth in the future to be quite phenomenal. Additionally, because I don’t think AI is a bubble, like the internet was in the 1990s, I don’t think the valuation is going to come crashing down. Also, as I mentioned above, Nvidia isn’t just an AI company. It has cleverly positioned itself as the provider of advanced computational power in almost all industries that require more advanced technology tasks.
Where are the real risks here?
Some clever AI companies today are looking for little inefficiencies in Nvidia’s massive strategy. There’s some risk that smaller companies could capture niche portions of the market that Nvidia would like to dominate. Nvidia might be the biggest provider of computational power in the world. However, it could find that it loses the battle of being the most efficient for single tasks.
Additionally, I’m preparing for some periods of share price volatility. For example, in 2025, analysts expect the firm’s growth to slow down. Because the valuation is already so high, investors could irrationally sell off more of the stock than is warranted, out of fear. That means I need to have the right temperament to hold this business through the market’s reactions. I’ll focus on the long-term quality and growth inherent in the business.
Although I’m not a shareholder right now, I think I will be soon!
