Nvidia (NASDAQ: NVDA) has been the hottest stock on the market in the last year or so. Yesterday (18 June) it reached a major milestone as it became the most valuable company in the world with a $3.3trn market cap, surpassing rivals Microsoft and Apple.
More than $2trn of that has been added this year alone. That’s astonishing. Just a few years ago, the business was largely unknown by many retail investors. Today, it’s all market spectators can talk about.
As Nvidia keeps rising, it keeps attracting more attention from investors considering joining the hype and snapping up some shares. But at its current price, does that make sense? Is there any value left in the stock today? I want to try and answer that.
Price-to-earnings
To do that, there are a few core valuation metrics I can use. One is the price-to-earnings (P/E) ratio. As seen below, I’ve put Nvidia up against its peers from the Magnificent Seven. The chipmaker has a P/E of 79.1, higher than all its competitors. The nearest is Amazon with a P/E of 51.1. Based on that, Nvidia looks expensive.
Created with TradingView
Price-to-sales
Another valuation metric is the price-to-sales (P/S) ratio. Nvidia’s revenue has been soaring recently. Last year it rose 126% to $60.9bn.
As seen below, Nvidia is once again more expensive than all its peers. Its current P/S of 42.2 is significantly higher than its nearest rival Microsoft, which has a P/S of 14.1.
Created with TradingView
Overvalued?
So, does that mean Nvidia is too expensive? On the one hand, while the stock looks a lot more expensive than its competitors, it has often been the case that big tech stocks have traded above their intrinsic value for long periods of time. Nvidia is posting exceptional growth. So, maybe its overvaluation could be justified right now.
On the other hand, there’s the risk that Nvidia is in a bubble. A stock rising 3,486.7% in five years is incredible. However, whether it’s sustainable is another issue.
There’s been talk of investors getting carried away with the stock and that’s the biggest risk I see with Nvidia. Is it just the case that excited investors have pushed its share price up quickly? Could the first sign of a slowdown in growth see it come tumbling down?
The industrial revolution
Maybe. But it really doesn’t seem like the company will be taking its foot off the accelerator any time soon.
In its latest results, revenues continued to skyrocket. For the first quarter, they jumped 262% year on year to $26bn. Speaking about the results, founder and CEO Jensen Huang stated: “The next industrial revolution has begun.”
What I’m doing
I opened a position in Nvidia in June 2023. Today, I’m sitting on a whopping paper gain of 220.9%. I’m now pondering my next move.
I don’t want to be greedy. So, despite being a long-term investor, maybe I should take some profit? That said, Nvidia seems to continue defying expectations.
If I didn’t own the shares, I’d be tempted to open a position. However, I’m cautious that the first sign of a slowdown could see its share price sharply pulled back. While I’m bullish on Nvidia in the long run, I’d hold off from buying any of the shares right now.
