The chipmaker's shares scan as overvalued, but a deeper story is emerging.
Nvidia (NVDA 1.14%) has been the heart and soul of the U.S. stock market for nearly a decade, with the artificial intelligence (AI) gold rush propelling the graphics processing unit (GPU) specialist to a staggering 27,500% gain over this period. However, Nvidia's meteoric rise has recently fueled skepticism from bears, drawing parallels to the dot-com bubble of 1995 to 2000.
Speaking to this point, Morningstar strategist Brian Colello believes Nvidia's stock is fairly valued at $105 per share after its 10-for-1 stock split went into effect on June 10. Nonetheless, the GPU-titan's shares have already jumped to $136 a little over a week post-split, putting it in overvalued territory, according to Colello.
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Is Nvidia's stock really overvalued? Let's dig deeper to find out.
Nvidia's fundamentals aren't comforting
From a fundamental perspective, Nvidia's stock appears to be in bubble territory. The company's shares trade at 52 times forward earnings, significantly higher than the S&P 500's forward price-to-earnings (P/E) ratio of 21.
Moreover, Nvidia's price/earnings-to-growth (PEG) ratio of 1.55 and price-to-sales ratio of over 42 are well above the averages for technology stocks and the semiconductor industry, respectively. These traditional valuation metrics paint a picture of an extremely overvalued stock.
However, a fundamental analysis may not be the most appropriate approach in this case. Generative AI holds the potential to fundamentally reshape the global economy. AI is poised to radically enhance worker productivity and create entirely new markets, possibly unlocking trillions of dollars in value across all sectors of the global economy.
The economic potential of AI is astounding. McKinsey & Co. estimates that generative AI could unlock up to $17.7 trillion in economic value, while Nvidia's CEO Jensen Huang believes the global AI economy is on pace to eventually top $100 trillion.
To put this into perspective, Nvidia's current market cap stands at $3.35 trillion, which may seem astronomical at first glance but is a drop in the bucket when compared to where the global economy is headed in the age of AI.
What about competition?
Some analysts have argued that rivals like Advanced Micro Devices and Intel may enjoy a windfall from AI-centric companies diversifying their hardware-sourcing requirements in the years ahead, but the reality is far more complex. Nvidia's GPUs and complementary CUDA platform are simply too far ahead of the competition, especially with a full-on arms race occurring in AI.
Core AI developers don't have the luxury of switching to a competing platform at this critical juncture, despite the risks associated with overreliance on a single chip designer. In other words, Advanced Micro Devices and Intel might be able to carve out a rather profitable niche in AI-capable chips but aren't going to significantly erode Nvidia's market share among the most important developers driving the bus, so to speak.
Final thoughts
While Nvidia's stock may appear expensive and overvalued based on traditional metrics, it's essential to consider the company's central position in the AI revolution. With automation and an abundance of intelligence on track to redraw the global economy within a few short years, Nvidia's bull run is likely just getting started.
As such, the fearmongering over another dot-com-type bubble seems wholly unwarranted. It also grossly underestimates the transformative potential of this technology that many think will be the most important invention in the history of humanity.
George Budwell has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel and short August 2024 $35 calls on Intel. The Motley Fool has a disclosure policy.
