Nvidia (NASDAQ:NVDA) stock’s expensive. And I don’t mean it’s expensive because it’s been trading at 67.7 times earnings for the last 12 months. A single share’s now worth $860. That means not everyone can afford to own it. It might sound trivial, but it’s something worth considering. I’m building a portfolio for my five-month-old daughter with £200 a month. She can’t afford Nvidia.
As a side note, I don’t expect it to introduce a more modestly-priced share option. After all, there are more expensive stocks out there. However, it’s interesting to note that it’s happened before. In 1996, Berkshire Hathaway introduce its Class B stock — the Class A shares are now worth $608k each.
So back to Nvidia. It might be a little pricey from a practical perspective, but is the stock overvalued? Let’s take a closer look.
Understanding valuations
There are plenty of ways to value a stock. UK-focused investors are probably quite familiar with the price-to-earnings (P/E) ratio and the dividend yield. However, when we’re looking at growth-focused stocks — and there aren’t too many of them on the FTSE 100 — it’s necessary to look, understandably, more closely at growth.
As such, we need to look at forecasts. These give us an idea of a company’s trajectory. And we can use them to establish whether a business is going to look cheaper in the future.
Moving forward, analysts expect Nvidia’s earnings per share to grow at 34.78% over the next three-to-five years. That’s exceptional growth, but it means we need to look beyond past earnings multiples. Looking at 2024, we can see Nvidia’s trading at 35.59 times forecasted earnings.
And this leads me to the price-to-earnings-to-growth (PEG) ratio. It’s calculated by dividing the forward P/E ratio (35.59) by the average annual growth rate for the medium term (34.78%). As such, Nvidia has a PEG ratio of 1.02.
Traditionally, a PEG ratio under one suggests a company’s undervalued. However, in the current market, it’s not easy to find companies with ratios under one. In fact, Nvidia is the only member of the ‘Magnificent Seven’ to have a PEG ratio anywhere near one. It’s also industry-specific. For 2027, Nvidia’s expected to trade around 20 times earnings. That’s not expensive for tech, by current standards.
As such, I don’t think Nvidia’s overvalued. Personally, I think it’s still got some way to go, but obviously it’s not as cheap as it once was.
The leader, but for how long?
Nvidia’s chipsets are central to the revolution in artificial intelligence (AI). Originally designed for gaming, the company’s graphics processing units (GPUs) also possess parallel capacity that’s perfectly suited to AI workloads.
Other companies, notably Intel, are after its crown. And while competition’s a risk for investors in the long run, it seems unlikely any other company will match it in the medium term. The Santa Clara-based firm has already built on the success of the H100 chipset with the H200.
The H200 is thought to offer between 1.4-1.9 times faster large language model inference compared to the H100. And Nvidia certainly has the resources to build its lead further. Free cash flow also amounted to a staggering $11.2bn in the final quarter of fiscal 2024.
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James Fox has positions in Nvidia. The Motley Fool UK has recommended Nvidia. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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