NVIDIA Corp (NASDAQ:NVDA) stock is one of the hottest things in the stock market currently. Up 877% from its low set in the 2022 tech bear market ($12), it has beaten the market by extreme percentages.
NVIDIA’s gains – part of them anyway – have been deserved. You’ll note that, earlier, I said that NVIDIA stock was up by 877% from its September 2022 lows. Its earnings are up 800% in the trailing 12-month period alone! If anything, NVIDIA’s earnings growth has run out ahead of its stock price appreciation. Going by multiples, the stock is not actually trending more expensive over time.
However, there are questions about how long NVIDIA’s high earnings can persist for. Other companies are noticing the money NVIDIA is making with AI chips and eying pieces of the pie. In fact, when it comes to on-device AI, other companies have taken the entire pie: Apple’s new “Apple Intelligence” will run on-device with chips designed by that company. The on-device AI on Android smartphones will presumably run on Qualcomm chips.
There are many ways that this could play out, and not all of them result in continued high gains at NVIDIA. In this article, I will explore the factors impacting NVIDIA’s valuation and try to determine where the company will be in five years.
High growth
One thing that NVIDIA has going for it today is high growth. In the trailing 12-month period, it grew at the following rates:
- Revenue: 208%.
- Net income: 802%.
- Diluted earnings per share (EPS): 803%.
- Operating cash flow: 494%.
- Free cash flow: 430%.
The long-term growth rates aren’t as good, because this AI-driven growth spurt began only recently. However, the five-year compounded annual (“CAGR”) growth rates are still A-OK:
- Revenue: 49%.
- Net income: 66%.
- Diluted EPS: 66.6%.
- Free cash flow: 83.8%.
A steep valuation
As we’ve seen, NVIDIA stock has very high growth. Extraordinarily high growth in the last 12 months, and very high growth compounded over the last five years. However, much of this growth is being paid for, with NVDA trading at multiples like:
- 70 times earnings.
- 39 times sales.
- 36 times book value.
- 77 times cash flow.
That’s a very expensive valuation. So, to make an informed investment in NVIDIA today, you need a plausible reason as to why the company’s sky-high growth will continue. To know that, you need to be sure that a competitor won’t emerge and take NVIDIA’s lunch. I’ve studied NVIDIA more than most have: despite that, I’m not sure that AMD won’t come out with something that bests NVIDIA’s offerings.
Foolish takeaway
Taking everything into account, I think that NVIDIA will do well over the next five years. However, I’d be inclined to think that the stock’s current pullback will continue for a while. Somebody who bought NVDA at $12 and held to today has already earned several years’ worth of profit in stock price appreciation: it’s only natural they’d cash in. So the near term for NVIDIA might not look so great.
