Nvidia’s Valuation May Be Frothy

Shares of Nvidia (NVDA) have been on a tear recently, spurred on by this year’s artificial intelligence (AI) frenzy.  Nvidia, a key supplier of computer chips needed to power chatbots and other AI applications, has more than doubled in price since falling to a 2-year low in October.  However, the stock’s surge has taken its valuation to potentially frothy levels, suggesting further upside may be hard to sustain.

According to Bloomberg data, Nvidia currently trades at 56 times projected earnings, nearly three times more expensive than the Philadelphia Stock Exchange Semiconductor Index’s ($SOX) 21 times and about a 150% premium to the Nasdaq 100 Stock Index ($IUXX) (QQQ).  Nvidia’s average multiple over the past ten years has been 30 times projected earnings.

Nvidia today is up more than +1% after upbeat forecasts from Micron Technology (MU) and Infineon Technologies AG bolstered confidence in chipmakers.  Also, Piper Sandler today raised its price target on Nvidia to $300 from $275.  However, Fort Pitt Capital Group said, “Nvidia certainly looks frothy,” and the stock’s multiples are “a bit too rich.” Adams Funds added that Nvidia’s valuation is “bordering on a little breathless.”

Despite Nvidia’s rapid ascent and sky-high valuations, most analysts remain undeterred by their bullishness in the stock.  According to Bloomberg data, analysts who cover Nvidia have 42 buy-equivalent ratings on the stock, by far the most bullish recommendations of any chipmaker.  In addition, Morgan Stanley earlier this month upgraded Nvidia to overweight, citing the boost the company is getting from the generational AI “megatrend.”

Nvidia’s recent rally might be showing some cracks.  After nine straight sessions of gains through last Thursday, the longest run since December 2016, the stock has fallen back in the last three trading sessions. However, Globalt Investments, which owns shares of Nvidia, said, “when the case is just so compelling, you’ve got to own this.”  Bernstein said Nvidia’s earnings estimates have an “upward bias” going forward, and owning the stock is the “best way” to play the AI theme.

On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.