The performance of Nvidia (NASDAQ: NVDA) over the last five years has been astonishing, with the stock skyrocketing by 2,081% during that time.
Currently, Nvidia boasts a market capitalization of $3.3 trillion and trades at a price-to-earnings (P/E) ratio of 54.
While this valuation isn’t unique—Amazon, for instance, has a P/E of 47—it still exceeds what some investors, including myself, find acceptable.
Back to the Future
Let’s rewind five years.
At that time, Amazon had established itself as a growth stock and appeared fully valued. Since then, its stock has appreciated by 135%.
This growth pales in comparison to Nvidia’s meteoric rise over the same period. However, Amazon had already delivered remarkable long-term growth, similar to Nvidia’s recent performance, managing to more than double its value since early 2020.
Could Nvidia experience a similar trajectory in the future?
Is it possible that, even if the extraordinary gains of the past don’t continue at the same pace, the stock might still climb higher in the coming years? Or has it already reached its peak?
The Case Against Buying Nvidia Today
First, let’s consider the bearish perspective regarding the chipmaker. As mentioned earlier, Nvidia’s P/E ratio makes me hesitant to invest, as it appears overvalued.
However, the company’s earnings have surged significantly in recent years. If they were to revert to levels from just a few years ago, the prospective P/E ratio could skyrocket into the hundreds, not remain at 54.
Could this scenario come to pass?
A surge of companies rushing to acquire chips for a competitive edge in AI may lead to an initial spike in demand. Yet, after the initial wave of acquisitions, the need for AI chips could diminish in future years.
Moreover, competitive forces could erode the pricing power currently enjoyed by industry leaders like Nvidia and Taiwan Semiconductor Manufacturing.
Here’s How Things Could Improve
On the flip side, what if AI is indeed a transformative trend destined to persist?
Just as Amazon was once perceived as excessively valued for its online retail business, Nvidia might leverage its competitive advantages in chip design and manufacturing to strengthen its position in a rapidly growing sector and subsequently broaden its business reach.
Recently, the company’s CEO stated, “the age of AI is in full steam, propelling a global shift to NVIDIA computing.”
While he could benefit from a more modest tone, the essence of his statement may prove to be accurate. The current surge in demand for Nvidia chips might not be merely a temporary spike, but instead an indication of substantial future sales potential for the industry leader.
I’m in No Rush to Buy
I believe either of these outcomes could unfold.
While I recognize that Nvidia’s technology, customer base, and ambitions could suggest a promising future for its stock, the current valuation raises concerns for me amidst the associated risks.
At an appropriate valuation, I would invest in Nvidia stock in an instant. For now, however, I prefer to hold off.
