Eight years ago, Nvidia (NASDAQ: NVDA) mostly sold computer chips to make video games look prettier – the shares went for $8 apiece.
In 2024, the shares change hands for over $800. Nvidia is the third-largest company in the world. And the chipmaker added more market cap in a single day than the value of Rolls-Royce, Tesco and BP combined.
The funny thing? The shares might still be underpriced. Let me explain.
Same old
Last quarter’s earnings was same old for Nvidia. That is to say, record sales, record profits, guidance upgraded and analysts’ estimates shattered.
We can thank artificial intelligence, of course. AI has become a gold rush and Nvidia is selling the shovels.
What’s more, Nvidia has first mover’s advantage. No one else makes so many high-performance chips used in machine learning. Not yet, anyway.
This means Nvidia can book huge orders even while it marks up prices. Just look at the following (quarterly!) chart.
CEO and co-founder Jensen Huang oversaw this meteoric rise. He’s been in charge since 1993. Nice to see the reins given to someone who cares about the long term, too.
Let’s get down to the nitty gritty then. Are the shares expensive?
Well, Nvidia trades at 66 times earnings. So, yes. Very expensive. But with such rapid growth, I’d discard this for a forward-facing measure.
Nvidia trades at 33 times forecast profits. In the tech world, this isn’t extraordinary. Apple is at 28. Meta is at 32. Microsoft is at 47!
If – and it’s a very big if – demand for its chips continues then a $1,000 share price or higher doesn’t seem out of reach in 2024.
Before it gets there, there’s plenty to deal with.
First, its chips make up a precarious 94% of the AI market share. Other chipmakers like AMD will be doing their level best to offer competing products.
Second, AI has the makings of a bubble. Making a silly autogenerated picture is fun. A chatbot that spits out a (probably) correct answer is handy. But these aren’t killer applications.
Will the current form of AI be as revolutionary as the smartphone? Or will it be as niche as virtual reality headsets? We don’t know yet.
Summary
Here’s my summary then. Despite a rapid rise, Nvidia isn’t that expensive. But there are plenty of threats to its big revenues.
The important question then. Am I buying the shares today?
I’ll answer a better question. How much have I already bought? Like a lot of people with money in popular index funds, I’ve invested in Nvidia already.
The MCSI World Index Fund has a 3% weighting of the stock. So a £10,000 stake in the fund hands me £300 in Nvidia shares. That’s enough exposure for me.
