The question all active investors ask themselves these days is should I buy Nvidia stock or is it already too late? After all its stock rose by 192% and 3,295% over the past year and last five years respectively. Is there still upside to be had? In this article, we take a look at Nvidia’s fundamentals to answer whether Nvidia 📈 is a good stock to buy right now and how it compares to peers, such as QCOM 📈 and AMD 📈.
Why is Nvidia’s stock so hot?
Nvidia’s stock is arguably the best moment stock right now due to its strategic position in the AI revolution coupled with an explosion in profitability thanks to its dominant market position in the chips industry. In addition to massive demand from AI-related applications, Nvidia’s chips are also the go-to-solution for high-performance data centers, gaming or the car industry.
Competitors’ stocks have also had good runs.
AMD 📈 is up by 36% over the past year.
QCOM 📈 is up by 77% over the past year.
Both stocks are dwarfed, however, by Nvidia’s run. Neither AMD nor Qualcomm can even remotely match Nvidia’s growth prospects.
AI demand
Nvidia has managed to capitalize on the booming demand for AI chips in an incredible fashion. This has led to a 262% revenue increase in its data center sales. The company’s latest innovations, such as the Blackwell GPU, are specifically designed to handle massive AI workloads, further reinforcing Nvidia as a leader in the AI chip industry.
Market position and pricing power
Nvidia has secured a highly dominant position in the semiconductor industry, especially in AI and high-performance computing. This has given the company tremendous pricing power, illustrated by the significant premium it can command for its AI GPUs. For instance, Nvidia’s H100 AI GPUs can cost up to $40,000, which is four times more than AMD’s competing MI300X GPUs, priced between $10,000 and $15,000.
This stark difference highlights Nvidia’s ability to charge substantially higher prices due to the overwhelming demand and optimization for its CUDA software stack
Extensive growth potential remains intact
Despite the recent surge in stock price, the Nvidia’s valuation level is not unreasonable when viewed through a forward-looking prism. With AI adoption expected to grow across various sectors, Nvidia’s future revenue and earnings streams look as bright as ever. The following chart illustrates the explosive revenue growth Nvidia is projected to enjoy over the coming years. Some analysts even project revenue to surpass the $200B mark in 2026.
As of 6/4/2024
Focus on forward-looking valuation metrics
Nvidia is growing so fast that it virtually makes no sense to look at historical valuation metrics. As the following chart shows, Nvidia’s PE ratio drops from 67x relative to last year’s earnings to a reasonable level of 22x relative to 2027 projected earnings.
As of 6/4/2024
Can Nvidia deliver on these earnings growth expectations?
Is the story of multi-year demand and slump cycles in the chips sector different this time? We believe it is.
Contrary to historical cycles in the chips sector, the underlying demand is structural in this cycle. Heavy demand stems from a multitude of sources, such as AI, data centers, autonomous driving, virtual reality to name just a few. If you are aligned with this view, chances are that Nvidia’s current growth estimates may be beaten – as was the case with analysts’ revenue and earnings expectations in each of the past few quarters.
Furthermore, analysts are likely to underestimate the power of the software and IP ecosystem that Nvidia has managed to build in recent years.
Putting valuation into perspective: Valuation versus growth rate
The best way to put valuation into perspective relative to growth is through the PEG (PE Ratio/Earnings growth) ratio. As a general rule of thumb, if the ratio is at or below 1, a company’s growth rate is indeed attractively priced.
As the following chart shows, this is the case for Nvidia in all but 1 year over the period 2024 through 2027. In light of recent earnings beats, there is a considerable chance that the 2027 earnings will be revised upwards in the coming years, which could result in the 2027 PEG ratio to drop below 1 sooner rather than later. In this case, the answer to the question should I buy Nvidia stock is clearly yes.
As of 6/4/2024
A different dimension of profitability
When you thought it can’t get better than 100% revenue growth rates for a $3T company, think again. In 2026, Nvidia is set to attain a return on equity of close to 100% – a level that is unheard of for a company with a “real” balance sheet due to its ownership of both physical and intangible assets (think patents).
In actual numbers, this means that Nvidia will make $85B in profit, which compares to projected total equity of around $80B.
As of 6/4/2024
60% margins and rising
Nvidia’s pricing power – thanks to market dominance – has doubled its EBITDA margin to as much as 60% in 2024. The trend is likely to continue – albeit at a somewhat slower place. Experts do not see Nvidia’s pricing power diminish anytime soon, given the strong underlying trend in high-performance computing, gaming, and artificial intelligence applications. The company’s pricing power is further reinforced by Nvidia’s strong brand reputation and its ecosystem of software and maintenance.
Excellent financial strength
With a financial health score of 97, Nvidia outperforms 97% of its peers on financial solidity. Its massive operating cashflow – $28B in the past year – is powering an accumulation of cash and short-term liquidity. The company is debt free, going from strength to strength.
As of 6/4/2024
A massive stock buyback program and more to come
As its coffars rapidly fill up with cash, Nvidia recently announced a $25B stock buyback program – already one of the biggest in stock market history. We believe this is just the starting point. Cash generation is growing at a mind-boggling pace. Net cashflow from continuing operations reached $15B in the past quarter, up fivefold year on year.
Annualized cashflow also quintupled to $28B. To put these numbers into perspective, R&D expenses amounted to just $9B in the past year.
This and subsequent likely even larger buyback are going to decrease the number of outstanding shares and in turn increase earnings per share.
In conclusion, should I buy Nvidia stock or is it too late?
Investors who conservatively value Nvidia on historical earnings will find the stock egregiously expensive with a Price to Earnings ratio of 67x. But clearly that’s not the right way to value Nvidia.
As we have shown in this post, when putting valuation into perspective with growth, the picture changes. 2025 and 2026 PEG ratios are at or below 1, an extremely interesting level for a stock like Nvidia. If earnings beats continue and once the company buys back even more stock, even the 2027 PEG ratio of 1.25 is likely to drop below 1.
By comparison, measured on a 2027 PEG ratio, Nvidia’s stock is significantly cheaper than MSFT (1.57x) or META (1.37).
Although from the current level, returns are unlikely to be as spectacular as over the past three-year period, our fundamental analysis bears out that Nvidia remains a good stock to buy, both relative to its peers and with respective to its absolute return prospects. The upcoming stock split will make the shares considerably more accessible for private investors.
Important notice:
This article is not to be understood as a recommendation to buy or sell. Please conduct your own research before making investment decisions. To this end, we aim to provide you with the best portfolio management tool and investment research data possible. However, we cannot guarantee the accuracy of this information in spite of our extensive efforts to ensure that the data is complete and 100% accurate.
