Okay, I have to preface the title a bit – when I first started putting this piece together, Nvidia (NASDAQ:NVDA) was indeed trading at a market capitalization north of $5 trillion. A multi-day decline has led the world’s leading high performance chip maker to a valuation right around $4.6 trillion at the time of writing, so there’s been some strong downward pressure on Nvidia of late.
Quick Read
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Nvidia (NVDA) controls 80% of the high-performance computing market and has $500B in AI chip orders.
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Nvidia’s forward P/E ratio has dropped to 30x as profitability growth outpaces revenue growth.
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The stock has surged 1,200% over the past five years despite valuation compression.
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Indeed, in this environment where valuations are certainly at levels which may make many investors uncomfortable, investors may be looking for a reason to sell some of their winners. Taking profits off the table is a strategy that most in the investing game won’t blame others for implementing. But the question is whether selling Nvidia at this point in the AI super cycle makes sense, with many analysts continuing to point to the fact that we’re still likely very early on in this whole rotation toward hyper-growth AI dominance among certain firms.
For Nvidia, the supplier of the most powerful semiconductors powering this revolution, spending has remained very strong (and has accelerated until now). The question some investors are putting forward is whether this spending growth is sustainable.
Let’s dive into that piece, and take the bullish side of the argument as to why Nvidia still looks like a solid long-term bet, even at this valuation.
Nvidia Stock Has become Cheaper Over Time
Businessman putting a checklist together
One of the most compelling arguments I continue to see from Nvidia bulls as to why this stock is one that should be bought and held long-term (and never sold) is the idea that Nvidia’s profitability growth should outpace its revenue and capital appreciation growth over time. At least in recent years we’ve seen this play out, with Nvidia’s forward price-earnings multiple continuing to shrink from the three-digit realm toward a current forward P/E ratio of “just” 30-times.
Now, that’s still a good deal higher than the market multiple, which stands around 25-times forward earnings (driven a great deal by Nvidia, which now makes up around 8% of the S&P 500). But less than 30-times earnings is a valuation which is now within the realm of reality for many investors who need certain fundamental valuation levels to be satisfied before investing in this stock.
Nvidia’s ability to grow, and do so very profitably with high margins, has allowed this stock’s valuation to come down while NVDA stock has surged roughly 1,200% over the past five years alone. Going back further, those gains are much, much larger.
If you’re of the view that Nvidia’s core growth drivers are fully intact, and the company’s competitive advantage in this sector is widening (not narrowing thanks to competition), these same factors should drive continued price appreciation as future earnings beats come through.
AI Dominance Driven By Expanding Moat
AI visual
With a market share of around 80% in the high-performance computing market, Nvidia’s GPUs which are used in everything from data centers to cloud infrastructure and supercomputers are the dominant force in the rise of AI technology more broadly.
For investors looking for a true picks-and-shovels way to play the rise of new and more powerful forms of AI, Nvidia’s chips are the most logical piece of this technological revolution to invest in. With $500 billion in orders for AI chips announced, this tremendous backlog provides years of future growth for investors to rely on.
What this has led to is an outlook that’s unmatched, at least among Nvidia’s peers in the chip sector. And with even more announcements for further integrations with other technologies (such as the next-gen 6G wireless rollout, new-age cloud computing platforms, and other autonomous driving technologies, even greater dominance of industry partnerships on these fronts could cement Nvidia’s already rock-solid position in this sector over time.
Valuation Reflects Durable Growth
Stack of coins growing, with a green arrow heading up and to the right
I keep coming back to the valuation argument with Nvidia, because that’s really the most important factor that I think will take this stock higher over time. Nvidia will need to continue to beat expectations each and every quarter and grow its earnings at a faster pace than analysts believe in order for this stock to have a shot at continuing to double over time. At this market capitalization, that feat is going to become ever-more difficult.
The thing is, Nvidia has shown its ability to grow much more rapidly than any other company in history. Right now, the market appears to want to view this stock as a more mature player, trimming back implied growth forecasts on the basis of the current eye-watering growth the company has seen in recent years.
So, it’s really a matter of perspective. Those who think we’re going to be in an AI-everything economy in a few years’ time will want to own a slice of this revolution. With little in the way of truly meaningful competition, Nvidia’s dominance in providing the back end technology needed for companies advancing their own AI infrastructure should lead to outlandish profits.
It’s a question of what you think those profits will ultimately be, and whether Wall Street is underestimating the company’s potential over the long-term. So far, it does appear to be the case that the answer to this question is yes.