Sometimes you miss big, big chances in life. Take Nvidia (NASDAQ: NVDA) as an example. I looked into Nvidia stock around seven or eight years ago without buying any. Over the past five years alone however, the chipmaker has soared by 1,755%.
I missed out in a big way.
Despite that meteoric rise though, Nvidia sells on a price-to-earnings (P/E) ratio of 46. That is not exactly a bargain in my book, but still far cheaper than the 188 of Tesla. Indeed Nvidia’s P/E ratio is around half the of Intuitive Surgical. That is a successful but far smaller firm that has long been using forms of artificial intelligence (AI) in automating surgery procedures.
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With Nvidia stock losing a fifth of its value in under a fortnight, could now be a smart moment for me to add some to my portfolio?
Why the share’s been falling
A key reason for that fall this year has been concerns on Wall Street that the US model of spending massively on chips to ramp up AI capability might be overkill. The catalyst for those concerns has been the launch of a Chinese AI tool DeepSeek.
But whatever happens with DeepSeek, I am sceptical that it is as bad news for Nvidia as the stock price tumble suggests.
For now at least, I expect large companies in the US and elsewhere to keep spending massively on chips specially designed to help them ramp up and support their AI offering. That should be good news for Nvidia. It has unique manufacturing capabilities and proprietary chip designs as well as a large customer base.
I think having the right chips will be central to many large businesses’ AI strategy over the next several years. So I see DeepSeek as a limited risk to Nvidia’s business.
Potential value, but thin margin of safety
Still, that does not necessarily mean Nvidia is attractively priced. Clearly this is a fast-moving market. Earnings at the chipmaker have soared and its most recently reported quarter showed net income growing 109% year-on-year to $19bn. That has helped the P/E ratio stay in double not triple digits.
If earnings fall, the prospective P/E ratio will be higher than 45. I see that as a risk, as some recent earnings growth has been driven by businesses investing upfront in AI infrastructure that once in place may be used for years.
The market shudder DeepSeek has caused suggests to me that a fair bit of money in AI stocks right now is about investors being scared of missing out. That is rather than a sober and deep-rooted long-term understanding of how big the AI chip market is likely to be and what share of that market Nvidia should be able to command.
I think Nvidia has deep strengths and would happily buy the stock at the right price. But even after the recent fall, I think there is too little margin of safety for me at the current price. I will not be investing.
