Nvidia is beginning to look like Tesla a few years ago before its shares soared.
Like Tesla, which had the EV technology to change the automobile industry then, Nvidia now has the Graphics Processing Units (GPU), the chips at the core of the graphics, computing, and networking solutions behind the gaming industry, data centers, autonomous vehicles, and Artificial Intelligence (AI).
In addition, Nvidia enjoys multiple advantages, like innovation, leveraging its core competencies to address fast-growing emerging markets, solid alliances with technology leaders like Microsoft and Amazon, and an extensive distribution network.
Then there’s the strong following of the company among technology enthusiasts and early adopters. They are ready to bring these technologies to the masses, stirring the hype on Wall Street for Nvidia shares.
But its stock is expensive, trading way above its intrinsic value of the most optimistic intrinsic value of $313.85, as calculated by my Columbia University students Xiaoye Wang and Haotian Zhang.
At a forward PE of 84, Nvidia’s stock is overvalued compared to other tech stocks like Apple, Google, and Microsoft, which trade at a fraction of that valuation. Still, it looks undervalued compared to Tesla’s valuation five years ago, when the EV pioneer traded with a valuation twice as much as Nvidia sells right now.
“Nvidia’s ascendancy aligns well with our philosophy, as it is pioneering advancements in several future-forward domains like gaming, cryptocurrency, and artificial intelligence (AI),” William Lam, a neuro-linguistic programming expert, told International Business Times. “They’ve methodically mastered the art of leveraging these disruptive trends, just as we at UPGRD embrace cutting-edge training technology for efficient and quick upgradation of our clients.”
In its corporate history, Nvidia has grown its product portfolio and expanded into various markets, including high-performance computing, data center solutions, the automotive industry, professional visualization, and AI.
These moves have allowed the company to enjoy strong revenue growth, high-profit margins, and solid cash flow. For instance, Nvidia’s 60% gross profit margin is among the highest in the industry, while its Economic Value Added is 13.30%, meaning that the company creates plenty of value as it grows.
Lam sees a parallel between Nvidia’s current valuation and Tesla’s, but that’s a consequence of investor confidence in Nvidia’s potential.
“This confidence is reinforced by Nvidia’s ability to evolve and innovate consistently, hallmarks of a transformative tech titan,” he explained. “These traits should not be overlooked, as they directly reflect Nvidia’s strategic prowess and adeptness at staying ahead of the curve. The company’s agility has been its strongest asset in a rapidly evolving tech landscape.”
Robert R. Johnson, a professor at Heider College of Business, Creighton University, is skeptical about this comparison, worrying that investors may set themselves up for disappointment. “People believe that identifying a new trend and investing in it early on is a path to riches,” he told IBT. “One need to look no further than the automobile industry to show this is not the case.”
Johnson uses a quote from a speech by Berkshire Hathaway CEO Warren Buffett at a Sun Valley business gathering in 1999 that describes the experience of the auto industry in the early part of the last century. These days, it created much hype among investors who poured money into 2,000 companies that promised to change the world.
Ultimately, the world changed as the automobile industry grew by leaps and bounds. Still, only three car companies survived, often selling for less than book value — the amount of money that had been put into the companies and left there. That means autos had an enormous impact on America rather than on investors.
“I think this to be much of the hype with Nvidia,” added Johnson.
Lam isn’t that pessimistic. Instead, he believes whether Nvidia’s stock is a worthy investment right now depends on the specific investment strategy and risk tolerance.
“Like Tesla, Nvidia operates in a volatile market, and inherent risks are involved,” he said. “However, it’s pivotal to remember that the potential for high rewards often comes together with increased risk in the innovation economy. If one believes in Nvidia’s continued capacity to ride the crest of tech waves, an investment in their stock could be viewed as an investment in the future of technology.”
Sam Boughedda, Equities Trader and Lead Stock Market News Writer at AskTraders.com, agrees. “While Nvidia shares will no doubt ride the AI trend for as long as it lasts, making it a retail favorite, there will, of course, come the point where it dies down, and the shares will pull back,” he told IBT.
“However, when that time comes is impossible to pinpoint. Even so, I do feel AI will be a significant driver of the stock and business in the medium term.”
Editor’s note: The author owns shares of Nvidia.
