It was around this time three years ago when the hype around Nvidia (NASDAQ: NVDA) shares was reaching fever pitch. The share price had more than doubled in the space of a few months. Folks were seeing this new-fangled ChatGPT thingamabob and flooding into the company that made the chips that made AI possible. Many were calling it a bubble and saying there was no way Nvidia shares could keep climbing.
What happened then? Nvidia proved all the naysayers wrong. On the back of many billions spent on this new technology, the chipmaker’s share price went on an absolute tear. In the three years since, the shares are up more than sevenfold. A £7,000 stake would have grown all the way to £49,919 (that’s ignoring dividends). And the strangest thing? The stock still doesn’t look all that expensive to me.
Why so cheap?
It will come as little shock to anyone that Nvidia is largely an artificial intelligence play. If this technology lives up to some of the boldest predictions about it then the stock will likely continue going stratospheric. Big question then – why is the valuation so ‘cheap’?
The stock trades at 27 times forward earnings. That might look pricey compared to your run-of-the-mill boring ‘dinosaur stock’ but it looks like an absolute bargain when compared to most growth stocks.
Other prominent companies in or near the AI space are looking much more expensive. Compare the P/E ratios of Tesla (in the 300s) and Palantir (in the 200s) by way of example. It’s also only a whisker above the S&P 500 average too.
Crazy stuff. So what’s going on here?
Buying frenzy
Firstly, it’s worth pointing out that the current models of artificial intelligence (or large language models) don’t require such vast quantities of chips to run. The massive amount of computing power is needed to train them instead.
What that means is the current buying frenzy – and commensurate surge in Nvidia revenues – might just be a passing phase. While forecasts still look good for the short term, the amount being spent here might not be sustainable.
Another real issue for many is the possibility of an ‘AI bubble’. While the technology looks great on the surface, the actual productivity gains have been minimal so far. A notable study out of MIT found that only 5% of companies were using them profitably. That could spell disaster if it’s a sign of things to come.
On the whole? We are very much in uncharted territory here. Where artificial intelligence and Nvidia go from here is not easy to predict. But if AI is a pivotal technology of the future, then it’s hard not to see the company’s future looking bright too. I think the stock is worth considering.
John Fieldsend has positions in Nvidia and Tesla.
