Investors who bought into chip company Nvidia a few years back certainly hit the jackpot. The Nvidia stock price has soared 1,371% over the past five years alone.
On a longer-term perspective, the performance has been even more phenomenal.
Over the past decade, Nvidia stock has soared 25,444%. Wow!
Bear in mind that Nvidia invented the graphics processing unit (GPU) in the last century, so it is not as if a decade ago it was some little-known tech start-up.
At the right price, I would be happy to add the company to my portfolio. But is it likely to come back down to $100 and closer to a buying opportunity for me – or might it hit $200 first?
The $100 case
Getting to $100 would require a fall of around a third from the current price. That is less dramatic than the 50% jump required to take the price to $200.
A $100 price would also simply take Nvidia stock back to where it was fairly recently. Indeed, the price was under $100 in the second half of last month.
On that occasion, a falling price was caused by concern about US tariff policy and the impact of potential restrictions on certain types of technology transfer. Those fears may not now be attracting the market jitters they were last month, but they have not gone away.
Indeed, with US policymaking currently in uncharted territory, it is feasible we could see a repeat of the sort of trade policy uncertainty we witnessed last month. That could push Nvidia stock below $100, I reckon.
The share’s incredible run has reflected the massive chip spending companies have been making as they ramp up artificial intelligence (AI) initiatives. If that starts to fall, I could imagine a significant negative impact on the stock price of chip companies including Nvidia.
The $200 case
Still, any company that has seen its share price grow over 25,000% in a decade clearly knows a thing or two about successfully navigating uncertainty.
Getting to $200 would require Nvidia stock to move around a third higher than its all-time high. That sounds challenging. But the company has a lot going in its favour. Its market is already huge, yet still growing at a rate of knots. Thanks to a large installed user base and proprietary technology, Nvidia has few if any competitors for many sales.
Last year, diluted earnings per share (reported on a generally accepted accounting principles or ‘GAAP‘ basis) soared 82%. Even if they moved up by a more modest 50% this year, a $200 Nvidia stock price would be in sight if the price-to-earnings (P/E) ratio is the same as it is now.
If the market thinks a higher ratio is in order, thanks to ongoing growth, even less than a +50% in diluted earnings per share could propel Nvidia stock to $200.
My move now
Still, the current P/E ratio of 45 is already too rich for my tastes, bearing in mind the risks I mentioned above. I see a pathway for Nvidia stock to hit $200 – but also for it to go back below $100, potentially sooner than it hits $200.
For now, I will sit back and wait for what I see as a more attractive price before investing.
