We’re just a few business days into the new year, but NVIDIA stock is already soaring.
As if a 171% gain in 2024 wasn’t enough, Nvidia’s stock price (NVDA -0.02%) By the market close on January 6th, it had already risen about 9%. That beats the S&P 500’s year-to-date return by almost 8 percentage points. Such impressive momentum is probably leaving many investors wondering how long the stock can continue to rise so quickly. There’s no way to know for sure how much the graphics processing unit (GPU) specialist’s stock will rise in the coming months, but investors can still consider whether the stock is attractive at current levels. You need to make time for it. At the end of the day, short-term stock price movements mean little to investors looking to buy and hold a stock for the long term.
So, is NVIDIA stock a buy at current levels, or does the stock’s current valuation already factor in its expected business growth?
Sales and profits soar
One thing is clear: Nvidia’s business is firing on all cylinders. Revenue for the most recently reported quarter was $35.1 billion, up 94% year-over-year and 17% sequentially. This was primarily due to a 112% year-over-year increase in data center revenue, representing 88% of total revenue for the quarter. Of course, data center revenues have benefited from the seemingly unstoppable demand for computing power to support artificial intelligence (AI) technology.
“The era of AI is in full swing, driving the global transition to NVIDIA computing,” Nvidia founder and CEO Jensen Huang said during the company’s third quarter earnings call. The tailwind for this technology has been incredible, with companies en masse adopting AI to enhance their workflows, and even waking up to the fact that investments in AI are a critical component of the country’s technology infrastructure. It even includes countries where
This momentum has led to impressive profitability. Nvidia’s net income for the most recent quarter was $19.3 billion, more than double the $9.2 billion reported in the same period last year.
Finally, this strong growth makes Nvidia’s balance sheet a fortress. The company has about $38.5 billion in cash, cash equivalents and securities, even as it increases spending on stock buybacks. In the subsequent nine months ending October 27, 2024, it spent $26 billion on stock buybacks.
Nvidia investors need to tread carefully
But this is where things get a little tricky. The rise in Nvidia stock has brought the company’s market cap to nearly $3.7 trillion at the time of writing. The company’s earnings and cash balance, while impressive on their own, pale in comparison to these numbers. Additionally, consider how this valuation compares to Nvidia’s trailing 12-month earnings. The company trades at a P/E ratio of 59x, which factors in earnings continuing to grow rapidly over the next few years, not just the next 12 months.
Of course, NVIDIA is almost certain to continue growing at an impressive pace in 2025. The company’s tailwinds are substantial and unlikely to abate anytime soon. However, investors should keep in mind that the semiconductor industry is cyclical. Furthermore, competition is fierce. Chipmaker Intel is a good example. (INTC -0.65%) Once upon a time, the company enjoyed so much control that it was hard to imagine it ever falling from grace. But the stock has fallen 67% over the past five years as Nvidia and other chipmakers have outsmarted Intel on almost every front. Moreover, technology was changing too quickly for the company to keep up.
There’s always a risk that the same thing could happen to Nvidia in the future. Given Nvidia’s dominance, it’s hard to imagine Intel’s disastrous underperformance will continue anytime soon. The real risk to investors is likely more subtle. For example, if Nvidia’s growth slows and its profit margins narrow, investors could begin to question Nvidia’s premium valuation and the stock price could plummet. Moreover, even the slightest hint that a company’s AI spending is nearing its peak can hurt stock prices.
With all this in mind, it may be worth taking a wait-and-see approach to Nvidia stock. It’s a great business, but the high valuation may have priced in much of the company’s future growth.
Daniel Sparks and/or his clients have no position in any stocks mentioned. The Motley Fool has positions in and recommends Intel and Nvidia. The Motley Fool recommends the following options: February 2025 $27 short call on Intel. The Motley Fool has a disclosure policy.
