Nvidia hit another milestone yesterday, becoming the third U.S. company to reach a $3 trillion market cap, following Apple and Microsoft.
However, it has outshone its predecessor, Apple, as Nvidia has now surpassed Apple to become the second-largest company.
What’s even more impressive is that Nvidia reached the $2 trillion mark in February 2024, and just four months later, it hit $3 trillion. This is the fastest any company has ever achieved a trillion-dollar increase in market cap!
A lot is going well for Nvidia and its CEO, Jensen Huang. A viral photo of him signing the chest of a woman speaks volumes about the admiration for him and his company.
Many investors have been asking: Is this the peak for Nvidia?
The issue with stocks like Nvidia, which is experiencing a huge acceleration of growth, is that they are very difficult to value and whether the moat will last. This is why Buffett isn’t buying Nvidia due to the uncertainty.
Thus, there isn’t a straightforward answer as to whether Nvidia is overvalued. Everyone is guessing, resulting in a wide range of values. One of our writers, Joo Parn, has his take too which he articulated here. Even looking at analysts’ target prices won’t help. Six months ago, the average target price was $641.23; it was raised to $987.90 two months ago, and now it stands at $1,152.44. Basically, analysts are raising their forecasts as the share price soars higher. No one has a clue how high Nvidia shares can go.
Nvidia has a PE ratio of 70.6x and a trailing 12-month year-over-year revenue growth rate of 208%, giving it a PEG ratio of just 0.36. Anything less than 1 is considered cheap for its growth. If Nvidia can maintain a 100% growth rate for a few more quarters, even a $1,738 share price is still reasonable. But, as you can see, the question hinges on Nvidia’s future growth rate, which is anyone’s guess. That’s where the uncertainty lies and why we can’t get an accurate valuation of Nvidia.
One thing I know is that the hyper-fast growth rates will end one day as the demand for AI chips normalizes after most servers or computers have already adopted them. At that point, growth will shift to largely replacement mode. Additionally, growth rates will slow as Nvidia starts to lap the higher base in the future. However, we don’t know when this day will come. When it does, the stock will re-rate downwards due to the lower growth rates.
On the other hand, I’m a believer in momentum strategy, and Nvidia is definitely a stock with lots of momentum even at this moment. It is therefore more applicable to enter and exit based on momentum principles rather than growth or value strategies. From a momentum standpoint, I believe it is possible for Nvidia to surpass Microsoft and become the most valuable company in the world. Furthermore, I think being the first company to hit a $4 trillion market cap remains a possibility. However, momentum is also about risk management, so having an exit plan is crucial should any profit target fail to materialize.
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Better to look for other alternatives, anything that enhances AI, those other businesses that can help AI to perform better