Chip giant Nvidia (NASDAQ: NVDA) has recently regained its crown as the world’s most valuable listed company, squeezing Microsoft off the throne. That reflects a surge in the Nvidia share price, which has risen by 46% in a matter of weeks since the second half of April.
Could that momentum continue – and ought I to add some Nvidia stock to my portfolio now?
To answer both questions, I will set out what I see as the bull and bear case for Nvidia at the current share price.
Nvidia could move higher from here: the bull case
The recent rise has not come from nowhere. Over five years, the performance of the Nvidia share price has been even more spectacular, growing 1,483%.
Nvidia has a strong position in a market for chips that is not only huge, but continues to see substantial year-on-year growth.
Thanks to its proprietary designs, highly profitable business model in the sweet spot of the value chain, and a large client base, Nvidia has been making money hand over first. In the first quarter of this year, its net income was a phenomenal $18.8bn.
Nvidia trades on a price-to-earnings (P/E) ratio of 45. That is higher than I like to pay for a share in most circumstances, but it is not unusually high in the context of a tech stock (Microsoft is on 36).
The chip company can arguably justify such a valuation because of its ongoing strong growth prospects. The first-quarter net income figure I mentioned above was 26% higher than in the prior year period, for example.
If Nvidia’s business continues to grow strongly due to high customer demand, I expect earnings will keep rising and the share price could move up even from here.
Lots of unknown and unknowable factors: the bear case
When I said above that a P/E ratio of 45 would normally (not always) put me off buying a share, it was because, as an investor, I like to have what billionaire Warren Buffett refers to as a “margin of safety”.
On one hand, I do think Nvidia could keep growing at a rate of knots and merit a higher share price (potentially much higher over the coming years).
But there are lots of unknown — and currently unknowable — elements along the way that pose a risk to such an outcome.
For starters, how big will the chip market be? The recent surge in demand due to AI installations could be just the beginning of structurally higher usage – or it might be a one-off.
Another unknown is competitive developments. If another company can offer enough of what Nvidia’s chips do at a much lower price, it could squeeze profit margins across the industry.
On top of that, trade policy and tariff disputes are a double-edged sword for the firm, in my view. They threaten sales and revenues, though they could also make Nvidia more focused on spreading its reach into new markets.
With so much currently unknowable about its market in coming years, the Nvidia share price is not at the sort of level where I am prepared to invest.
