Is Nvidia Stock Too Expensive? What Investors Need to Know

NVIDIA (NASDAQ:NVDA) stock continues to be the best of the best in AI growth, but could investors be valuing it too highly?

| More on:
Double exposure of a businessman and stairs - Business Success Concept

Image source: Getty Images

Investors are waiting on tenterhooks for NVIDIA (NASDAQ:NVDA) stock to share its most recent earnings report this week. However, the stock continues to surge higher and higher, with the chance of hitting US$800 in the near future. This has made some question whether it’s now in an overvalued and volatile position.

With this in mind, today we’re going to look at whether Nvidia stock indeed is overvalued. Shares are now up 231% in the last year alone. It’s also become one of the Magnificent Seven on the S&P 500, with a market cap at a whopping US$1.78 trillion as of writing. So, let’s look at three points investors will want to consider before picking it up ahead of earnings.

1. Is record revenue enough?

Nvidia stock continues to report record revenue, with the company’s earnings growth surging in the last quarter. There have been substantial year-over-year and quarter-over-quarter improvements. The tech stock reported record revenue of US$18.12 billion during the last quarter, up 34% from the second quarter and up 206% from the year before.

This included record data centre revenue at US$14.51 billion, a 41% increase from the second quarter (Q2) and 279% from the same time last year. While this is all well and good, it’s also key to look at the company’s valuations to see whether it looks to be overvalued.

Nvidia stock currently trades at 95.16 times price to earnings (P/E) over the last year. The price to sales (P/S) is also at 40.03. These are both quite a lot higher than those of many of its competitors, which usually hold a much lower P/E ratio and P/S ratio. And with shares surging higher, it could definitely be that any bad news could see the share drop.

2. Advancing forward

Sure, it does seem that it’s overvalued based on metrics — especially as investors continue to be excited about the tech stock. However, Nvidia stock continues to make strategic partnerships that should see it continue to hold the artificial intelligence (AI) market. Most recently, this has included partnering with Beamr Imaging to help the company transition to AV1 video format. As more companies tap the tech stock for use, this will only expand its revenue streams.

Then, there’s the company’s expansion of its products. Nvidia stock continues to develop more powerful and even energy-efficient graphics processing units (GPU) to handle workloads — especially in the AI field, where workloads are only becoming heavier.

And honestly, the overvalued position in the Magnificent Seven only gives it more attention. That attention leads to companies wanting Nvidia stock as their first choice, leading to more growth. And that growth can certainly mean long-term growth as well.

3. Still more growth

The thing is, the overvaluation could still be worth it for long-term investors. That’s because Nvidia stock holds an incredibly dominant position in AI. The company continues to see more widespread adoption of its GPUs. This is incredibly helpful as companies around the world expand their use of AI and deep learning.

What’s more, Nvidia stock is looking to create more diversification beyond even better products. It may have started out with gaming, but it now operates data centres, professional visualization, and even automotive growth.

And this is really only the beginning. Companies around the world continue to demand growth in AI. It’s been called “The Next Internet” by none other than Ian Gardner here at the Motley Fool. And as AI growth continues, Nvidia is likely to find even more opportunities for growth and hold its market leadership.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool recommends Nvidia. The Motley Fool has a disclosure policy.

More on Tech Stocks

data analyze research
Tech Stocks

1 Stock I’m Buying Hand Over Fist in April Despite the Market’s Pessimism

Are you looking for a stock to buy this month despite the pessimism in the market?

Read more »

Male IT Specialist Holds Laptop and Discusses Work with Female Server Technician. They're Standing in Data Center, Rack Server Cabinet with Cloud Server Icon and Visualization
Tech Stocks

Constellation Software Stock: Buy, Sell, or Hold?

Constellation Software stock has rallied 186% in the last five years and is now valued at an expensive 100 times…

Read more »

Money growing in soil , Business success concept.
Tech Stocks

3 High-Growth Stocks That Could Help You Become a Millionaire

Are you looking to grow your nest egg? Here are three Canadian stocks that should be on your watch list.

Read more »

Man holding magnifying glass over a document
Tech Stocks

Watching This 1 Key Metric Could Help You Beat the Stock Market

One key metric that Buffett looks at is the return on equity. Here's why you should watch it.

Read more »

Daffodils in bloom
Tech Stocks

2 Best “Magnificent Seven” Stocks to Buy in April

Two surging mega-cap tech stocks are the best buys among the “Magnificent Seven” this April.

Read more »

clock time
Tech Stocks

Up 47%, Is it Time to Buy Payfare Stock?

Payfare (TSX:PAY) stock has been rising higher in the last six months after dropping significantly since 2021. Is it time…

Read more »

Clock pointing towards a 'sell' signal
Tech Stocks

2 Canadian Growth Stocks to Buy and 1 to Sell

Financial growth stocks like EQB Inc (TSX:EQB) are much cheaper than tech growth stocks.

Read more »

Target. Stand out from the crowd
Tech Stocks

The Most Expensive Stock in Canada Is a Top Buy Today

This stock might be expensive, but it's proven time and again that it's worth its weight in gold. And it's…

Read more »