Nvidia stock forecast: irrational valuation but don’t short

Nvidia (NASDAQ: NVDA) stock price rally regained steam as the artificial intelligence hype continued. The shares regained the resistance level at $440 as it jumped by more than 5%. This rally will likely continue after reports that Saudi Arabia and UAE were buying thousands of GPUs for their AI investments.

Good company, questionable valuation

Nvidia is without a doubt a great company with some of the best products in the tech industry. Its GPUs and other products are used across all industries like electric vehicles, AI, Bitcoin mining, and computing. Analysts at Morgan Stanley noted that the company’s growth will continue for a while. Their statement said:

“We would expect durable steady growth beyond that as well, though the current supply chain shortage will likely be less of a factor by second-half of  2024 given that overall industry conditions are oversupplied, with the exception of narrow specialty technologies to support the existing ramps.”

Still, my biggest concern with Nvidia is its valuation. Let us look at the numbers. Nvidia has a market cap of $1.01 trillion. If it was a country, Nvidia would be the 18th economy in the world.

For a company of that size, you would expect it to have billions in revenue, growth, and profits. Nvidia is growing but not as quick to justify a $1 trillion valuation. 

According to SeekingAlpha, Nvidia’s annual revenue came in at $26.9 billion and analysts expect it will reach $113 billion by 2030, as I wrote here. This means that the company is trading at ~10x 2030 revenues and ~39x TTM revenue. In contrast, AMD, Intel, and Texas Instrument are trading at less than 10x TTM revenue. 

Nvidia’s net income has also risen gradually. Its net income came in at $4.3 billion, giving it a PE ratio of 213x. Its F1, F2, and F3 PE multiples are 51, 36, and 27, respectively. Analysts expect that its net profit will hit over $10 billion by 2030. Therefore, it is hard to justify this valuation amid key macro themes like AI and EVs.

Is Nvidia stock a good buy?

So, is Nvidia stock a good investment? To be clear, like Mastercard, Tesla, and Visa, Nvidia has always been a pricey stock. Therefore, it is always difficult to short the company based on these fundamentals.

Nvidia has a great reputation and is a core company in key industries like AI, EVs, data centers, and gaming. All these are multi-trillion industries that will continue growing in the next decade. It is also way ahead of its key competitors like Intel and AMD. Therefore, when investing in Nvidia, the best approach is trend-following and momentum.

The next key catalyst for Nvidia will be earnings, which are set to come out on August 23rd. Analysts expect the company’s revenue to come in at $11.06 billion, up from $7 billion in the previous quarter. Its revenue was $6.7 billion in Q2 of 2022.