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.
