Two years ago, in mid-December 2022, Nvidia (NASDAQ: NVDA) stock was priced at $18. At close on 13 December 2024, the price was up to $134.
That’s a seven-bagger and then some. And it would have turned £5,000 invested exactly two years ago into more than £37,000 today. Or a £20k ISA allowance could now be worth £149,000.
The question is, what happens next? A continued boom or a bust? There are arguments both ways, and I think both hold water.
What AI profit?
All the big tech companies (and many others) are piling into artificial intelligence (AI) development as if there’s no tomorrow.
I get nervous when I think back to the dotcom boom of 1999-2000. Yes, the internet was clearly going to be a revolutionary thing. But so many back then couldn’t see where the actual profits were going to come from.
And when I see both the S&P 500 and the Nasdaq soaring, my nerves tingle just that bit more.
A couple of months ago, Jeff Remsburg from InvestorPlace said: “Beware extreme investor sentiment. It’s often precisely when the market begins shifting in the other direction.“
And the European Central Bank warned us just a few weeks ago of a possible AI stock bubble, which could burst if bullish expectations aren’t met.
AI revenues to soar?
Right now, some forecasts are putting AI revenues north of $1.3trn by 2032, up from the modest $128bn expected for 2024. That’s a long way out though, and I wonder how much of it is largely guesswork.
Still, even if we don’t know how well the big players can turn their massive AI investments into profits, at least Nvidia is making big profits today. It’s got to be the ultimate in ‘picks and shovels’ investments, supplying the seemingly unstoppable AI gold rush.
But the reaction to Nvidia’s latest earnings report causes me some concern. In its third quarter, the company recorded a 94% year-on-year rise in revenue, with earnings per share up 111%.
Both revenue and earnings beat expectations, but the share price fell back — presumably, the company didn’t beat expectations enough.
Fair valuation
The next place I turn is Nvidia’s stock valuation. Forecasts suggest a price-to-earnings (P/E) ratio of 47 this year, dropping to 25 by 2026.
By Nasdaq standards, that looks cheap. Tesla, for example, has an eye-watering P/E of 210 for the current year, down to 116 by 2026 forecasts. Nvidia’s P/E valuation is only around the same level as Amazon‘s, and that’s not really a ‘jam tomorrow’ company.
Purely on this fundamental valuation measure, I’d say Nvidia looks potentially cheap for a world-leading tech stock that’s already making fat profits.
But then I think of its market capitalisation of $3.2trn, and the nervousness creeps in again.
What next?
So what might £5,000 invested in Nvidia today be worth in another two years? Taking the stock valuation in isolation, I could be bullish.
But the threat of an AI bubble bursting is too much for my blood pressure. I’m not going to buy it or try to predict what might happen next.
