Nvidia Corp (NASDAQ: NVDA) shares are the best performers this year, upstaging all other options inside the S&P 500 Index.
Soaring a head-spinning 207% above its 2022 closing price, the semiconductor company has left many shareholders much wealthier. Today, shares are perched at US$439.02, gaining an additional 3.5% overnight. Nvidia is now worth more than a trillion dollars, boosted by an expedient rise in artificial intelligence (AI).
It’s a breathtaking resurgence for a company that had suffered a 66% crash in its share price between November 2021 and October 2022. This leaves sideliners wondering whether their chance to buy has come and passed.
Seeing dollars signs
Nvidia shares have been hot property in 2023. Though, the company’s forward guidance for the second quarter of FY2024 in May took it to a whole new level.
In its release, the chipmaker guided for US$11 billion in revenue. For context, the company posted US$7.192 billion in revenue in the first quarter. Since then, shares in the US tech company have been on an unstoppable upwards trajectory.
It all boils down to an expectation of what’s ahead. As AI becomes embedded in more systems, demand for powerful computing capabilities is slated to surge. As a leader in GPU performance and power efficiency, the market is counting on Nvidia as a beneficiary.
Without a doubt, the opportunity could be enormous. As it stands, there is US$1 trillion worth of data centre infrastructure globally running on inadequate hardware for the processing of large language models.
With its AI-targeted solutions, such as Grace Hopper CPU and DGX Cloud, many believe Nvidia is in pole position for the transformation.
This explains why analysts like Hans Mosesmann have a US$600 price target on Nvidia shares — suggesting a further 37% upside from here.
What will keep me up at night?
Legendary investor Warren Buffett said, “It is far better to buy a wonderful business at a fair price than a fair business at a wonderful price.” This quote weighs on my mind when considering an investment in Nvidia shares.
Firstly, I firmly believe Nvidia is a wonderful business.
I’ve experienced the exceptional quality of their gaming GPUs as the owner of a GeForce RTX 3080 graphics card. The company has maintained its leadership for decades, despite competition. And Nvidia remains founder-led by the exceptional Jensen Huang.
However, I can’t say with as much conviction that US$439.02 is a ‘fair’ price. Even if Nvidia’s net profits after tax (NPAT) were to grow at a compound annual growth rate (CAGR) of more than 45% for the next six years and traded at roughly 35 times earnings, my estimates suggest a potential 48% upside.
Realistically, forecasts aren’t worth much. The future is full of unknowns. Still, for this reason, I like to have a margin of safety built into the price I pay.
The upshot on Nvidia shares
Now trading at a price-to-earnings (P/E) ratio of 228, well above its historical average, I can’t confidently say I’d be buying Nvidia shares right now.
I still have high hopes for the business. However, I can’t help but feel that the market is putting the cart before the horse here.
In summary, I don’t think it’s too late to buy Nvidia shares. Instead, I believe there will be plenty of opportunities ahead as the market becomes irrational in the opposite direction. Don’t forget; nobody wanted to touch it two short years ago.
How quickly times, and irrational behaviour, change.
