Chipmaker Nvidia (NASDAQ: NVDA) is now worth $3.4trn. Nvidia stock is up 1,797% over the past five years.
Yes, you read that correctly. 1,797%.
So someone putting £20k into the (already well-established) tech firm in February 2020 would now be sitting on a holding worth just shy of £380k.
Given such a run, it could seem that Nvidia is headed for a fall – and maybe it is.
But, in fact, there are also reasons to be bullish about where it might go from here.
Here are a couple of reasons I think Nvidia stock could soar in price from today’s level over the next few years.
Unique position in high-growth market
The key reason behind the recent massive price growth has been investor excitement about artificial intelligence. Companies are already spending billions of pounds buying chips to help them optimise AI opportunities.
Warren Buffett likes companies to have a ‘moat’ or competitive advantage. Nvidia has a lot of proprietary technology that helps set its chips apart from rivals.
It may be that, after a burst of initial AI-related spending, the chip market cools down and Nvidia’s sales fall. Then again, recent activity could just be the start of something much bigger.
So I think Nvidia could benefit from having a unique position in a large, fast-growing market.
In its most recent quarterly sales update, the company’s chief executive said, “the age of AI is in full steam, propelling a global shift to NVIDIA computing”.
That makes it sound as if sales could potentially keep surging.
Profits could grow even faster thanks to economies of scale and the company’s pricing power. The third quarter, for example, saw year-on-year revenue growth of 94% but net income grew 109%.
If such heady growth continues – sales almost doubled in just 12 months — the investment case will grow and Nvidia stock could rise.
Nvidia arguably still has an attractive valuation
Despite its meteoric rise over the past five years, I think there is an argument to be made that Nvidia stock is attractively priced.
Its price-to-earnings (P/E) ratio at the moment is 55. That is high and indeed the valuation is the reason I currently have no plans to invest in the company, as I think it offers me insufficient margin of safety as an investor.
That said, although the P/E ratio is notably higher than some leading tech stocks, it is cheaper than some.
Tesla’s P/E ratio of 174 is over three times Nvidia’s, despite weaker business growth prospects based on last year’s performance. Meanwhile, some companies using AI substantially are far costlier. Palantir has a P/E ratio of 661.
If Nvidia can grow its earnings strongly – and as I explained above, I believe it can – the prospective P/E ratio is much lower than today’s 55. So if the market keeps the valuation roughly close to where it is now, higher earnings could mean a jump in the share price.
