Nvidia (NASDAQ: NVDA), Nvidia, Nvidia. For a while, the chip company seemed to dominate the business headlines.
Lately, though, attention has switched beyond AI, from energy prices to problems in the private credit market. Meanwhile, Nvidia stock has fallen to a price 18% below its high point over the past 12 months.
That means it sells for 35 times earnings. That still strikes me as pricey, but it is a lower valuation than we have seen at points in the past.
Could Nvidia be a potential bargain for my portfolio from a long-term perspective?
There’s still a brilliant growth story here
I think it may be.
After all, Nvidia has been growing massively in recent years. If that continues, it could further boost earnings, making the prospective valuation attractive.
The most recent quarterly results from the firm, published last month, were once again spectacular. Revenue was up 73% year on year. Diluted earnings per share did better still, growing 98%.
Those sorts of figures are rare even for a business with a modest baseline. But Nvidia was already huge years before those numbers. Its earnings jump in the latest quarter meant that it reported $43bn of net income for a single quarter.
Those numbers are phenomenal. Can they last – or get even better?
I reckon they could.
Companies have been spending vast sums building AI infrastructure. If that proves to be worthwhile, they may keep spending – and other businesses could also start doing the same.
With its proprietary technology and deep industry relationships, I expect that would be good news for Nvidia – and likely its stock price too.
A shifting demand landscape is a risk
Still, there are substantial risks here.
Will the business case for AI expenditure on the scale we have been witnessing stack up over time? The jury is out for now but it could be that the money spent turns out to be unjustifiable in terms of returns.
Even if AI expenditure keeps going strong, will that really be positive for Nvidia?
I believe it could well be, like I explained above. An alternative view, however, is that a successful market might draw in more competitors.
If a rival can deliver chips that offer even just some of Nvidia’s benefits, but at a much lower price, I reckon a big chunk of Nvidia’s business could disappear in short order.
On top of that, Nvidia has already been caught up in geopolitical and trade disputes about manufacturing locations and sales to some countries. I see those as ongoing risks for the company in the current geopolitical climate.
This could be a bargain, but I’m wary of the risks
As I said above, I recon Nvidia at its current price could be a long-term bargain for my portfolio.
Should I buy?
I am tempted. But while the price-to-earnings ratio of 35 does not seem outrageous to me, it is still higher than I am comfortable with.
The risks I outlined above could eat into earnings, making the prospective valuation less attractive than it currently seems.
There just is not the margin of safety I like as an investor, so for now I will not be buying.
