Key tech player Nvidia Corporation (NVDA) is getting attention for its skyrocketing valuation, largely driven by advancements in artificial intelligence (AI) and its irreplaceable standing in the computing hardware sector.
Right now I want to explore Nvidia’s financial performance and stock valuation, and compare it with other tech giants and potential alternatives in the AI space. We’ll also consider perspectives from a variety of viewpoints and evaluate Nvidia’s role in a diverse investment portfolio.
Nvidia reports a remarkable increase of 206% year-over-year in their Q3 revenue, totaling $18.12 billion. This revenue surge blows consensus estimates away and highlights Nvidia’s significant impact on both sectors, AI and accelerated computing.
While other tech giants like Intel (INTC) and Advanced Micro Devices (AMD) have also shown growth in these areas, Nvidia’s performance stands out for its sheer scale and speed.
But that’s just the good news.
The Stock Value/Revenue Disconnect
Despite its robust earnings, NVDA has experienced a surprising dip in the stock market, which leads us to question the sustainability of that high valuation.
Compared to the broader market and its peers, Nvidia’s stock trades at approximately 120 times its trailing earnings and around 30 times its forward earnings — significantly higher than the S&P 500 average.
Comparables
Apple (AAPL) and Amazon (AMZN), also tech giants, have more conservative price-to-earnings (P/E) ratios, which reflects different market positions and growth strategies.
Apple (AAPL)
A “Magnificent Seven” tech behemoth with a more conservative P/E ratio and an established, long-term market presence.
Amazon (AMZN)
Though known for its aggressive growth strategy, Amazon’s valuation is still more grounded than Nvidia’s.
Also in the AI Space
Vishay Intertechnology Inc. (VSH) and Photronics (PLAB) present themselves as potential alternatives in AI. They’re experiencing growth, but haven’t seen a similar overvaluation, or valuation surge, that might cause concern.
The Skeptic: Overvaluation Concerns
CEO David Trainer, of New Constructs, describes Nvidia’s valuation as “priced for perfection,” suggesting a higher-risk scenario. He says this valuation implies an unrealistic growth trajectory, reasonably casting doubt on the company’s mid- and long-term future.
Stocks with high future growth expectations, like Nvidia, can be risky investments. If those expectations aren’t met, it may upset the market, leading to significant corrections in stock prices.
A Bullish View
Analysts like Wedbush’s Dan Ives see Nvidia as a pivotal force in the AI revolution, placing bets on its immense potential to shape future tech. Ives thinks Nvidia’s prowess in graphics processing units (GPUs) positions the company as a frontrunner in AI, where GPUs are the technical cornerstone of deep learning algorithms. NVDA GPUs are the industry standard for AI applications thanks to their superior performance and efficiency.
The company’s unwavering commitment to AI research and development has already given us a steady stream of groundbreaking innovations, like its Tensor Cores and cuDNN libraries, which further cement its position in the AI landscape.
The bullish outlook also stems from Nvidia’s continual innovation in AI-specific technologies and its expanding ecosystem of partners and developers.
A Bearish View
While AI’s potential is undeniable, some concerns could hinder Nvidia’s growth in the AI sector.
For one thing, there’s the potential impact of U.S. export controls, which could restrict Nvidia’s ability to sell products to certain countries, like China. These restrictions could significantly impact Nvidia’s revenue and stifle its global expansion.
Secondly, there’s the high potential for AI sector saturation. As more companies invest in AI, the risk grows that the market might become overcrowded, leading to competition and price pressures. This could erode Nvidia’s profit margins and its market dominance.
Alternative Investment Opportunities
Exploring companies with more conservative valuations or emerging players in the tech sector may offer safer investment routes, aligning with a more moderate risk tolerance.
Companies like Qualcomm (QCOM) or Micron Technology (MU), which also operate in the tech space but with different market dynamics, could be considered.
Nvidia’s Place in Your Portfolio
Nvidia’s growth in the AI sector is impressive, but it exemplifies the complexities of investing in rapidly evolving tech companies. While NVDA’s technological advancements are significant and undeniable, the stock’s current valuation poses considerable risk, and I cannot recommend buying at this price. If you already own it, hold for better outcomes.