I remain bullish on Nvidia stock despite its overvaluation

Our author says Nvidia stock is overvalued right now. However, he still thinks it might be worth him buying because of the long-term growth prospects.

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Nvidia (NASDAQ:NVDA) stock is rallying because it managed to beat expectations in its recent earnings results. Expectations were already incredibly high, but the demand for AI and machine learning is so strong right now that Nvidia is the gift that keeps on giving.

Why I’m bullish on Nvidia

I think this company is one of the greatest in the technology field right now. A significant number of tech companies rely on Nvidia for computational power. Additionally, AI is now being used in healthcare, finance, automotive, retail, e-commerce, and more.

Nvidia’s CUDA architecture is crucial because it enables developers to accelerate their applications, making it the preferred choice for AI and machine learning projects.

The massive demand for computational power in data centres to fuel AI predominantly drove the 19% year-on-year growth in total revenue in the most recent quarter.

I consider it overvalued at this time

Over a long time horizon, I think the investment is worth buying and holding on to today. However, I’m not buying a stake right now because of the valuation.

In the past 10 years, its median price-to-earnings ratio has been 45. At the moment, it’s 88. I don’t think that’s as concerning as it looks on the surface, because the higher growth at the moment justifies an increase in the valuation.

However, I still think the current valuation is higher than it should be. Based on my research, I think a fair value for the company is if it were trading at a price-to-earnings ratio of around 60.

What this means is that the shares could experience a decline in price in the next year or two. However, over five years or more, I think Nvidia is going to grow substantially. This should dwarf any present issues with the valuation.

Risks worth considering

Despite my bullish stance on Nvidia over the long term, I don’t think its exceptional growth will last forever.

At the moment, when businesses are all scaling up their AI infrastructure, Nvidia is raking in high profits. However, once the market becomes more saturated, this growth is likely to slow down substantially. At that point, its likely that investors are going to start selling their Nvidia shares out of fear that the best days are gone.

That’s a medium-term risk worth considering. However, if a big sell-off does happen, I’ll be one of the first to buy a substantial stake. That’s because even though the growth might slow down from then on, it’s likely to still be rewarding. Additionally, the valuation will become better as a result.

Better late than never

I’d say that it is quite late to invest in Nvidia right now if I want to capitalise on the massive growth that the company has recently been delivering. However, over the long term, it should still provide good results.

I definitely want to buy a piece; I’m just waiting for the right time. In my opinion, this is one of the best companies in the world.

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.

Oliver Rodzianko has no position in any of the shares mentioned. 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.

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