The Nvidia (NASDAQ:NVDA) share price is at all-time highs, and investors just can’t seem to get enough of the action. However, with sales growth likely to slow down in 2025 and beyond, I’m very cautious about investing in it right now.
In my opinion, the company’s valuation has become speculative. Yet the long-term future of the firm is likely to be bright, despite any volatility that may occur soon in the share price.
Nearly $3trn market cap
The business had a market cap of $1trn in May 2023. Today, it’s valued at almost $3trn. Think about that — in just over a year, it’s gained $2trn! That’s about a 200% increase over its May 2023 valuation.
This hasn’t been pure speculation. Nvidia has been at the forefront of the AI and semiconductor markets. Primarily, it’s the rise in demand for graphics processing units for AI and machine learning that has made Nvidia’s sales boom so significantly.
Over the last year, the company has reported 209% revenue growth. This is evidence that the market cap expansion is well justified.
How high is too high?
However, it’s important to understand that this period of massive growth won’t last forever. One of the issues I have with the firm’s current valuation is that when Nvidia’s sales start to plateau, I think investors are going to think the price-to-earnings ratio is too high. At the moment, it’s around 71, and its price-to-sales ratio is around 38.
What this means is that investors at large are very excited about Nvidia. This is so much the case that they’ve pushed the valuation up to a point where they’re anticipating this massive growth to continue increasing for many years. Unfortunately, this doesn’t look like it will be the case.
As I mentioned above, leading analysts are expecting the company’s growth in sales and earnings to slow down in 2025 and beyond. Therefore, I think Nvidia has become quite overvalued at the present price. In fact, I think around 2025, the shares are going to reduce in value quite a bit.
I still love Nvidia for the long term
However, I still think Nvidia is going to be one of the most enduring companies in the world. It may just not stay at a $3trn valuation in the immediate future. But a few years out, I think it’s likely it will surpass this.
The reason I say this is I don’t believe Nvidia’s recent surge in sales and profit to be a one-time thing. Management has set the business up to be one of the lynchpins in AI development and deployment. In many respects, Nvidia is one of the integral components of making the future of technology possible.
Resistance is likely
Now, while Nvidia is well positioned to be one of the leaders in AI, there are also significant hurdles ahead.
For example, as the technologies become more advanced they’ll be capable of replacing more jobs. This will likely cause pushback from society. Therefore, Nvidia’s growth may suffer while it manages this resistance.
Based on this outlook of potentially slower growth for the company in the future and a very high current valuation, I’m staying on the sidelines for now and not investing.
