At the start of the year, Nvidia (NASDAQ: NVDA) had already had a great run. The chip business’s shares looked too expensive even then for some investors, including me. Yet since then, Nvidia stock has moved up by another 35%. It has recently been selling for close to its record high.
It is not just that the share price has moved. This year has seen Nvidia deliver strong results, meaning that valuing the company now is something of a different exercise to doing so back in January.
So, could the stellar run continue? Even after its 1,293% growth over the past five years, might the Nvidia stock price keep gaining? Should I invest?
Strong performance, strong prospects
That sort of share price growth does not come from nowhere.
Instead, I reckon Nvidia stock has soared for two key reasons.
The first is the undeniably strong performance of its business. In its most recent quarter, for example, year-on-year revenue growth was 56%. From $47bn of revenue, Nvidia delivered net income of $26bn – up 59% versus the same quarter last year.
A second reason behind the growth is not Nvidia’s current financial performance, but what investors think the business might be able to achieve in future.
After all, while Nvidia’s profitability is certainly impressive, the company now commands a market capitalisation of $4.4trn. That is around 52 times the firm’s earnings.
The share could go up from here
That looks expensive to me. However, I reckon that Nvidia stock may potentially move even higher from here.
For starters, we have seen some very strong earnings growth from the company in recent years. If that continues, it means that the prospective valuation may not be as costly as it seems when using current earnings data, as I did above.
On top of that, many investors are in love with the long-term outlook for the chip market thanks to huge demand driven by AI, among other factors.
We’re at a pivotal point
In this regard, I see Nvidia (and the wider chip industry) as being at something of an inflection point.
If what we have seen so far is simply the first wave of AI-related expenditure at scale, then Nvidia may just be scratching the surface. With its large client base and proprietary chip designs, a much larger end market could mean Nvidia’s earnings growing a lot more in years to come. On that basis, Nvidia stock could yet do very well indeed.
On the other hand, it may be that AI expenditure fizzles out after the current boom, as companies assess their return on investment. In that case, the current Nvidia stock price would be hard to justify.
It is that risk that puts me off investing at the current price.
