Nvidia‘s (NASDAQ: NVDA) stock is having an incredible run at the moment. Fuelled by excitement around artificial intelligence (AI), the stock has risen about 160% this year.
After that kind of rise, many investors – including those who own it and those who don’t – are probably wondering how to play the stock. With that in mind, here are three things you need to know about Nvidia right now.
Not a bubble?
In recent months, a lot of market commentators have said Nvidia’s now in ‘bubble’ territory. I don’t think that’s the case though. A bubble is when asset prices don’t match the fundamentals.
And look at the fundamentals here. Right now, tech companies such as Amazon, Meta, Google, and Tesla are scrambling to buy Nvidia’s AI chips. They literally can’t get enough of them.
Elon Musk, for example, recently revealed that Tesla’s looking to increase an order of Nvidia’s H100 chips from 35,000 to 85,000 by the end of the year (these cost about $30,000 each).
Given this demand, Nvidia’s earnings per share are expected to rise 120% this year to $2.71. That puts the stock on a price-to-earnings (P/E) ratio of 48. Expensive, yes. But hardly a bubble.
For reference, Amazon trades on a P/E ratio of 40 while Tesla trades at 71 times this year’s earnings forecast.
Earnings could be higher than expected
Now, the earnings per share forecast for 2025 is currently $3.61. That brings the P/E ratio down to about 36.
But here’s the thing. This earnings forecast could be too low, given the high demand for the company’s chips. According to Brad Gerstner of Altimeter Capital, who’s a major player in the tech space (it was his ‘open letter’ to Meta a few years back that sparked a turnaround in the company and the stock), we could actually be looking at earnings of $5 per share next year.
If his forecast is accurate (and it may not be), the forward-looking P/E ratio falls to just 26. At that multiple, the stock would actually look pretty cheap.
That would put the price-to-earnings-to-growth (PEG) ratio at around 0.3. A ratio under one generally signals a stock is undervalued.
Risk of a pullback
Of course, after the stock’s massive jump this year, there’s the risk of a pullback in the near term. Recently, technical indicators have signalled that the growth stock is ‘overbought’.
So if we were to get some bad news, such as a cancellation/delay of an order from a customer, or a new AI chip from a competitor, I’d expect the shares to fall.
It’s worth noting that the last time Nvidia stock was this overbought (in March) it had a near-20% pullback.
I’ll point out that an overbought stock can keep rising. However, investors do need to be careful with these stocks. Ultimately, it’s important to consider risk as well as potential reward.
