Is Nvidia Overvalued?

Nvidia has found a way to make the news almost daily. This month in particular, with earnings set to be released February 21st, many investors are positioning themselves ahead of the announcement. That being said, with Nvidia constantly making new all-time highs, is this stock overvalued? My answer is no, let’s look into this deeper.

Yes, AI (artificial intelligence) stocks are the latest craze but is this movement here to stay? That is what many investors are wondering. I say yes. Many companies, whether in the tech space or pharmaceutical, are shifting their efforts (and money) towards AI. Now what is artificial intelligence exactly? - Well, according to the Oxford Dictionary, AI is the theory and development of computer systems able to perform tasks that normally require human intelligence, such as visual perception, speech recognition, decision making, and translation between languages. So, it’s basically designed to take over the world (not really). All kidding aside, Nvidia appears to be here to stay, and many huge corporations are counting on it. A large percentage of Nvidia’s orders and revenue comes from chip sales with Microsoft and Meta. Nvidia’s main areas of expertise are gaming and creating, laptops and workstations, cloud and data centers, networks, GPUs, and embedded systems according to their website. Many investors have been leery of Nvidia’s revenues since it relies heavily on two companies for its financial intake but are Microsoft and Meta really going anywhere…no, but the AI space is getting broad so there may be other companies that come along and give those firms a competitive advantage.

For now, that seems unlikely, Nvidia is ahead of the game. Let’s look at one interesting stat I heard on CNBC the other day that involved forward PE ratios. Now a forward PE ratio uses forecasted earnings for the price-to-earnings ratio. It’s basically estimating the company’s future earnings. Nvidia’s is currently around 35%, which seems high and potentially inflating its current value but let’s compare this % to a company everyone has heard of. Apple’s forward PE ratio is about 29%. Many analysts seem concerned that Nvidia is at a pace that isn't sustainable but other headline companies like Tesla, which has forward PE of 58X, and Meta has one of 23X, so it appears Nvidia's growth is in line with market conditions. We’ll find out more February 21st when we have real data to dissect. 

My feelings heading into the release are if revenue beats expectations, this stock is destined for $800. If the numbers are meeting or even slightly weaker there may be a mass exodus and we could see that price back around $650. One thing to look at is option positions in the market and it appears that retail investors are positioning themselves for a chance to catch a move higher. 

Some other positive news recently was the disclosure of Nvidia’s stake in ARM Holdings, SoundHound AI, Recursion Pharmaceuticals and Nano-X Imaging. At the time of this news release Nvidia’s stock rose on the day. 

All this said, Nvidia (and AI stocks) should be in investors’ portfolios. The future of technology in all sectors will be reliant on artificial intelligence in the near future so we might as well learn it, understand it and invest in it.

Disclaimer: Past performance is not indicative of future returns. Opinions are my own. Profitable trades are not guaranteed.