In my opinion, the Nvidia (NASDAQ:NVDA) share price is now too high. I say this because the business’s results may have been stellar over the last year, but I think the valuation has become unreasonable. That’s happened as investors at large have become over-excited about the company’s position in AI.
Firing on all cylinders
The shares have increased in price by a massive 212% over the past 12 months. But to be fair, this has been supported by revenue growth of around 208% year on year and earnings per share growth of 586%. So it’s no surprise that Nvidia is the hottest technology company in the world right now given such powerful results.
But why do I think investors have got carried away? This period of massive revenue and earnings growth is unlikely to last forever. For 2025, Wall Street analysts are expecting the growth to slow down considerably. Leading up to this, I fear investors are going to become concerned about the company’s valuation. So over the next year, I’m expecting a price drop for Nvidia shares.
The price-to-earnings (P/E) ratio for the firm right now is 74, but it has a 10-year median ratio of 45. I think the stock really has only two options at the current valuation: to move sideways or down.
This doesn’t mean I don’t rate Nvidia highly for the long term. I think the company has positioned itself incredibly well to succeed for many years to come. However, in the short term, the market has become too excited about the investment, in my opinion.
Future prospects
Beyond the current valuation problem that potential investors like myself have to face, the company has huge future potential.
For example, management unveiled multiple AI and computing innovations at Computex 2024. These included AI-powered laptops with the likes of ASUS.
In addition, the company introduced the Blackwell platform. It’s designed for AI factories and it enables real-time generative AI at reduced costs and energy consumption.
Also, Nvidia’s involvement in powering Tesla‘s self-driving technology development, particularly through its AI chips, is something I’m really fired up about.
The AI landscape is evolving
Large tech firms like Microsoft, Google, Amazon, and Meta are currently developing their own AI chips to reduce their reliance on Nvidia. Unfortunately, this poses a threat to the company’s long-term revenue and earnings growth.
But also, there’s a growing threat from AMD in cost-effective computing solutions. Also, smaller companies like Cerebras and Groq are developing innovative AI-specific chips to compete.
In my opinion, Nvidia has a very strong first-mover advantage. Management has also given no signs that it’s going to stop innovating to keep ahead of the competition. However, I still need to consider all factors when deciding whether the current P/E ratio of 75 makes it too risky to invest.
Current conditions warrant caution
I’m interested in becoming a Nvidia shareholder. However, at the current price, I think the market has overvalued it. In the future, once the rapid growth period has eased, I think the P/E ratio is likely to come down somewhat. At that stage, I might be able to buy some shares when the company is perhaps undervalued. So, I consider this to be a game of patience. I just have to wait for the right time to strike.
