Over the long term, owning shares in Nvidia has made some people spectacularly wealthy. That is not surprising: Nvidia stock has soared by 1,467% over the past five years alone.
That means that the chip company now commands a market capitalization of $3.4trn. That is an unfathomable amount of money for many people.
But, odd though it may sound, could it be that Nvidia stock still has a lot of potential gains ahead of it – and ought I to invest on that basis?
Today’s valuation could be low
At the moment, Nvidia stock trades for 45 times earnings.
That might not sound cheap. By the recent standards of growth stocks, though, it is not exceptional. Compared to Palantir and its price-to-earnings ratio of 534, Nvidia may seem very cheap.
Why on earth would investors price Palantir stock like that? Clearly, they expect future earnings to be far in excess of today’s, potentially helping to justify such a valuation.
But the same could be true of Nvidia. It is already a hugely profitable enterprise. Last year, its net income was $73bn. That was at a net profit margin of 56%. That is very attractive – and as Nvidia further scales its business, it may be able to reap even more economies of scale and grow its profit margin further.
What about earnings? Last week, Nvidia announced first-quarter revenues of $44bn. Not only is that a large number in absolute terms, it also represented a 69% leap from the same quarter last year.
While net income did not grow at anything like that rate, it still showed a 26% year-on-year growth rate. For a quarter that involved significant geopolitical and tariff uncertainty directly involving Nvidia, that is a strong performance in my view.
I’m tempted, but not enough to buy
Things could get even better from here. Recent turbulence could have the long-term benefit of making Nvidia better able to spread its business across multiple regions, helping fuel growth. Demand for chips is very high. AI has helped drive that, but it could be that we are only really getting started in terms of AI demand.
With its proprietary designs, large client base, and strong industry position, Nvidia looks set to benefit from any such growth, as its recent business performance demonstrates. If it translates that into higher earnings in future, the Nvidia stock price could still move up substantially from here.
But while I remain compelled by the Nvidia investment case, the current stock price does not offer me sufficient margin of safety for my comfort as an investor.
AI investment may grow from here – but it could also be a flash in the pan that tails off. Over time, I expect more competitors to try and eat into Nvidia’s share. I do see it, even now, as a potential bargain. But the price is still not right for me, so for now at least I will keep watching without buying.
