It is difficult for a small- or medium-sized company to triple in size in a matter of months. But it is even harder for a large, well-established one to do so. That is exactly what has happened in the case of chipmaker Nvidia (NASDAQ: NVDA). The company started 2024 with a market capitalisation of over a trillion dollars, yet since then Nvidia stock has surged by 203%.
Not only that, but this latest growth streak is part of a longer-term trend. Over the past five years, the tech company’s stock price has jumped by an incredible 2,668%. Wow!
So can this positive momentum continue?
Valuation concerns
To answer that question – and help me decide whether now might still be a good time to buy some Nvidia stock for my portfolio – I need to ask a couple of questions.
First is how I see the outlook for the business. Secondly is how well I think that is reflected in the current valuation. Trading on a price-to-earnings (P/E) ratio of 69, Nvidia stock is far above my normal comfort zone for valuation. I will come back to that below.
Strong business performance
But what is it that we are valuing? Nvidia is a proven business with a huge actual and potential market. It has a lot of proprietary technology and client relationships that help give it a competitive advantage. Barriers to entry in chipmaking are high and involve not only money but also typically lengthy timelines.
Nvidia’s success was on show in the release of its latest quarterly performance update yesterday (20 November). Compared to the same quarter last year, revenues grew 94% to $35bn.
Net income more than doubled to $19bn. Diluted earnings per share also more than doubled.
Some challenges in valuing Nvidia
One quarter’s earnings are not necessarily indicative of what to expect at the full-year level. But soaring earnings could mean the prospective P/E ratio is well below the current figure of 69 I mentioned above, which was based on last year’s earnings.
However, it remains to be seen whether Nvidia’s recent phenomenal sales growth can be sustained, or if it is a one-off as businesses get ready for more artificial intelligence (AI) usage and so gear up accordingly. If that is the case, there is a risk that not only will sales growth stagnate, but sales revenues will actually fall from current levels. I would expect that to mean lower profits too – potentially much lower.
That makes it difficult to value Nvidia stock, in my opinion. On one hand, I think it could keep going up. The latest quarter’s sales growth was the stuff of investor dreams and the company expects next quarter’s sales revenues to be even bigger.
But as an investor, I like a margin of safety – and I simply do not see one with Nvidia’s current valuation. So although I think the price can keep rising, I fear that it may not and have no plans to invest currently.
