Nvidia share price surges but is it overvalued? Here’s what the charts say

The Nvidia share price soared in after-hours trading following the tech stock beating earnings expectations. Revenue in Q2 doubled.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Concept of two young professional men looking at a screen in a technological data centre

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The Nvidia (NASDAQ:NVDA) share price could surge Thursday (24 August) when the market opens. The stock more than delivered in its Q2 results earnings after the market closed on Wednesday. Its earnings not only impacted the Nvidia share price, but stocks around the world. The company is also buying back $25bn of stock, raising some questions about reinvestment. So, let’s take a closer look at this stock.

Mic-drop moment

Here’s a summary of the earnings that were described as a ‘mic-drop moment’.

  • Revenue jumped to $13.51bn, marking a remarkable 101% surge from the previous year. Analysts projected $11bn in revenue.
  • Adjusted earnings per share (EPS) stood at $2.70, a huge increase of 429% compared to the previous year. EPS outperformed predictions of $2.07.
  • Nvidia’s forward guidance for the current quarter was $16bn. That’s considerably higher than Wall Street’s $12.5bn forecast.
  • The graphics chipmaker’s shares jumped around 9% in after-hours trading on Wednesday, reaching a record peak of $515 per share.

Valuation

Nvidia shares are up 173% over the past 12 months, and understandably that’s had a profound impact on valuation metrics. We can observe the share price gains in the following chart.

We can see that Nvidia is almost in its own league. It is among the most expensive stocks I’ve ever come across. Starting with the price-to-earnings metric, on a trailing-12-month basis, it trades at 244 times earnings.

Created at TradingView

As we can see here, Nvidia trades at a huge premium versus peers including TSMC and ASML. Admittedly, neither company is as exposed to the AI boom as Nvidia, but it’s a useful comparison. Nvidia’s GPUs — traditionally used in the gaming sector — are the platform of choice for AI developers around the world.

Next, using the price-to-sales metric, we can also see how expensive Nvidia appears. The stock trades at 45 times sales on a trailing-12-month basis. Normally, we’d consider a P/S ratio of 10 or above to be expensive. Clearly Nvidia is an exceptional case.

Created at TradingView

Nvidia trades at a huge premium to its peers. In fact, it’s around seven times as expensive as TSMC using this metric. Geopolitics is a major reason for the discount on the Taiwanese firm. But it’s interesting to note that TSM, like Nvidia, has a competitive advantage in its field. TSM also makes Nvidia’s chips.

However, on a forward basis, Nvidia starts to look less expensive, although it’s clearly trading at a premium. Of course, it’s worth noting that its intrinsic value is based on its long-term potential to generate revenues on the back of a boom in AI development and usage.

Created at TradingView
Created at TradingView

In conclusion, it’s clear that Nvidia trades at a premium to the market and its peers. However, it remains unclear as to whether that valuation is truly warranted. Momentum can be a fickle things when investing. And up 173% over 12 months, there’s clearly a lot of potential for price falls.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Fox has no position in any of the shares mentioned. The Motley Fool UK has recommended Nvidia. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Surely, the Rolls-Royce share price can’t go any higher in 2025?

The Rolls-Royce share price was the best performer on the FTSE 100 in 2023 and so far in 2024. Dr…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

Here’s how an investor could start buying shares with £100 in January

Our writer explains some of the things he thinks investors on a limited budget should consider before they start buying…

Read more »

Investing Articles

Forget FTSE 100 airlines! I think shares in this company offer better value to consider

Stephen Wright thinks value investors looking for shares to buy should include aircraft leasing company Aercap. But is now the…

Read more »

Investing Articles

Are Rolls-Royce shares undervalued heading into 2025?

As the new year approaches, Rolls-Royce shares are the top holding of a US fund recommended by Warren Buffett. But…

Read more »

Investing Articles

£20k in a high-interest savings account? It could be earning more passive income in stocks

Millions of us want a passive income, but a high-interest savings account might not be the best way to do…

Read more »

Investing Articles

3 tried and tested ways to earn passive income in 2025

Our writer examines the latest market trends and economic forecasts to uncover three great ways to earn passive income in…

Read more »

Investing Articles

Here’s what £10k invested in the FTSE 100 at the start of 2024 would be worth today

Last week's dip gives the wrong impression of the FTSE 100, which has had a pretty solid year once dividends…

Read more »

Investing Articles

UK REITs: a once-in-a-decade passive income opportunity?

As dividend yields hit 10-year highs, Stephen Wright thinks real estate investment trusts could be a great place to consider…

Read more »