Is Nvidia Stock Overvalued?

Forerunner in the AI chips market, NVIDIA Corporation’s shares have enjoyed a tremendous run-up following strong quarterly results and business updates. However, is the stock’s current valuation reasonable?

The ongoing shifts across industries centering on artificial intelligence have influenced Wall Street meaningfully. The global AI market is expected to grow at a 37.3% CAGR until 2030, and the Silicon Valley based firm has been a prime beneficiary already.

NVIDIA Corporation (NASDAQ:NVDA) has become the most prominent name in the AI space but has it run too far too quickly?

The company has primarily become the top AI stock because of the surging demand for its highly efficient graphics processing units (GPUs), which are crucial for training large language models (LLMs) — the underlying technology powering generative AI.

While NVIDIA remains well-positioned to thrive due to its AI market dominance, is its momentum about to end on valuation concerns?

What is Fueling NVIDIA’s Momentum?

NVIDIA’s recent share price performance can be attributed to its strong quarterly numbers and business growth.

The stock has delivered nearly 250% gains over the past year and more than 30% over the past month. It is trading above its 50-day and 200-day moving averages of $716.84 and $516.94, respectively.

Moreover, the firm’s recent developer conference, in which NVIDIA showcased upcoming products and provided other important updates, triggered investors’ interest. Largely this can be attributed to the company’s efforts to expand its data center market capabilities and retain its controlling stake.

NVIDIA introduced Blackwell chips, which possess greater processing capabilities than the popular Hopper series. The company expects to ship the first chip from this range this year. Also, the company unveiled Nvidia Inference Microservice, its new software, which aims to smooth out AI deployment.

The company also focuses on building humanoid robots, which have the potential to be a game changer. Nvidia is strengthening its position through prominent partnerships and next-generation product launches.

NVIDIA’s Financials Are Stunning

NVIDIA’s revenue has been growing consistently. The company’s top line increased by 265% year-over-year to a record $22.1 billion for the fiscal fourth quarter ended January 28, 2024. That figure surpassed its own guidance of $20 billion. Also, the company’s full-year revenue came in at $60.90 billion, up 126% year-over-year.

It has benefited from the rising demand for AI chips and GPUs. Revenue growth translated to solid improvement in its bottom line. NVIDIA’s non-GAAP EPS for the quarter was $5.16, marking a 486% increase from the year-ago period.

Moreover, Data Center revenue stood at a record $18.4 billion, reflecting growth of 409% from the year-ago quarter, driven by the robust performance of its Hopper GPU computing platform and InfiniBand end-to-end networking. Management also revealed that AI inference accounted for about 40% of data center revenue over the past year.

In fact, data center revenues could have been higher than the level realized if U.S. restrictions for export to China had not come into play. However, the company is developing AI chips designed exclusively to comply with the rules for the Chinese market.

The company’s other segments, including gaming and automotive, did not realize the same exceptional growth during the quarter.

Management believes the company will be able to maintain its operational performance, though, in the upcoming quarters, which is evident in its current quarter outlook.

The company’s revenue is expected to be $24 billion in the first quarter of fiscal 2025, plus or minus 2%. Also, its non-GAAP gross margin is expected to be 77%, plus or minus 50 basis points.

Is NVIDIA Stock Overvalued?

According to 50 analysts, Nvidia stock is fairly valued and has 1% upside to fair value of $949.60 per share.

The remarkable price surge over the past months has led to a premium valuation for the stock. Its forward non-GAAP price-to-earnings (P/E) ratio of 36.37 is much higher than its industry peers. However, this ratio implies a more than 20% discount to the 5-year average.

Also, the stock’s non-GAAP price-earning-to-growth (PEG) of 1.04x compares favorably to the industry standards. So, given NVIDIA’s robust growth prospects in the next few years, the stock’s higher-than-industry P/E ratio is justified.

In addition, the stock has recently seen price target raises from analysts, including at Wells Fargo, who have lifted their price target from $840 to $970 and retained an overweight rating.

Also, Goldman Sachs analysts see significant upside potential as they project the stock to hit the $1,000 mark. This is a significant hike from the earlier forecast of $875 per share. The analysts have kept a Buy rating on the stock, highlighting their confidence in NVIDIA’s prospects.

Is NVIDIA Stock a Buy Now?

This year, the stock eclipsed a $2 trillion market capitalization. Moreover, the revised price targets and consensus recommendation of buying the stock reflect analysts’ confidence in the further upside potential.

While sales, profits and cash flows have been stellar, there is no doubt that the price-to-earnings multiple at this time is elevated and indeed so too is the price-to-sales multiple, which sits at 38.1x.

Add to that share price volatility and sweeping drawdowns, and it’s enough to keep all but the most enthusiastic investors committed to the stock through thick and thin.

Nonetheless, while competition is intensifying, NVIDIA’s industry-leading technology should keep its business momentum powering forward. The rebounding PC market is likely to be a further driving force. As a result, it Is likely to be a worthwhile investment now.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.