As 'AI Bubble' Chatter Grows, Is Nvidia Stock Overvalued?

For Nvidia (NVDA) stock, record highs have become a near-daily affair for the last several months. While there have been a few brief periods of weakness, the shares have been in a strong uptrend since the beginning of 2023.

Many were in disbelief when Nvidia’s market cap first surpassed $1 trillion back in May 2023, shortly after the release of its fiscal Q1 2024 earnings. NVDA stock went on to gain 240% on the year, eventually emerging as the best-performing S&P 500 Index ($SPX) stock of 2023 in the process.

With only two months of 2024 in the books, NVDA is already up 72% on a YTD basis, and its market cap has topped $2 trillion – dwarfing that of Alphabet (GOOG) and Amazon (AMZN), which were the other contenders to join the $2 trillion club.

Those looking to buy NVDA shares on the dip are bound to be a disappointed group, as there haven’t been many real “dips” in the stock. And amid the breathless rally in Nvidia stock, a section of the market now believes that the stock is overvalued. In fact, some now also argue that the entire artificial intelligence (AI) story is a bubble, and will end badly – just like the tech boom of the late '90s.

Here's our analysis of Nvidia’s valuation, based on multiple metrics, and how the stock's current multiples compare with its historical averages. But first, let’s begin by looking at the AI industry in general.

Is AI a Bubble, or For Real?

Apollo Global Management’s chief economist, Torsten Sløk, is in the camp that believes there is a massive bubble in AI. Sløk argued, “The top 10 companies in the S&P 500 today are more overvalued than the top 10 companies were during the tech bubble in the mid-1990s.”

Not all agree with him, though. and JPMorgan Chase (JPM) CEO Jamie Dimon is among those who don’t see parallels between the AI euphoria and the tech bubble of the '90s. “When we had the internet bubble the first time around… that was hype. This is not hype. It's real. People are deploying [AI] at different speeds, but it will handle a tremendous amount of stuff,” said Dimon. 

To be sure, while tech companies during the dot-com days were being valued on flimsy metrics, at least in Nvidia’s case, the AI-driven growth is for real. Nvidia forecast revenues of $24 billion at the midpoint for its fiscal Q1 2025, and Wall Street analysts expect its revenues to surpass $110 billion in this fiscal year and $130 billion in the next. 

To put that in perspective, the Jensen Huang-led company posted revenues of just under $11 billion in fiscal 2020. The company’s revenues have risen six-fold over the last four years, while the rise in profits over this same period has been even sharper. 

Valuation Guru Ashwath Damodaran Believes Nvidia is Overvalued

Valuation guru Ashwath Damodaran believes that the rise in Nvidia stock has gone too far. While the “dean of valuation” believes that almost the entire “Magnificent 7” lineup is overvalued, he singled out NVDA in particular.

“$NVDA is a bridge too far for me, and having halved my holding In Nvidia last summer, I plan to halve it again now. I have left money on the table by doing so, but there is no point having an investment philosophy, if you don't act on it,” tweeted the “dean of valuation.”

NVDA Stock Forecast Is Bullish

After Nvidia’s fiscal Q4 2024 earnings report, brokerages lined up to raise the stock’s target price, with UBS being a notable exception. That brokerage cut Nvidia’s target price from $850 to $800, while maintaining its “buy” rating.

Nvidia’s new Street-high target price of $1,400 (via Rosenblatt Securities) implies its market cap rising to $3.5 trillion, which is higher than the current market cap of Microsoft (MSFT) – the reigning largest U.S. company. Meanwhile, as has been the case after its past few earnings calls, Nvidia is nearing the consensus target price that analysts usually set for the next 12 months in a matter of days.

Is Nvidia Stock Overvalued? Here’s What the Metrics Say

Let’s now look at Nvidia’s valuations based on multiple metrics.

• Price-to-book multiple: While this multiple is rarely used for tech companies, as they don’t have many assets on their balance sheets, Nvidia’s current price-to-book multiple is over 46x, which is around twice the average multiple for the last five years.
• Price-to-sales multiple: Nvidia’s next 12 months (NTM) price-to-sales multiple stands at 19.4x, which is somewhat higher than the five-year average of 15.8x.
• Price-to-earnings (PE) multiple: This is the most widely used multiple, and Nvidia’s NTM PE multiple is 34.6x – significantly below the five-year average of 41.6x. Among its “Magnificent 7” peers, Meta Platforms (META), Apple (AAPL), and Alphabet all trade at a lower multiple, while Microsoft’s NTM PE is similar to Nvidia's.
• Earnings growth and price-to-earnings-to-growth (PEG) multiple: When it comes to growth, none of the Magnificent 7 names even comes remotely close to the 81% revenue growth and 84% earnings growth that Nvidia is expected to report in fiscal year 2025. On a similar note, Nvidia’s 1 year forward PEG ratio is way below 1 - which not only signals undervaluation, but is the lowest among all major tech companies.

NVDA Continues to Ride the AI Wave

Here, it is worth noting that merely looking at the numbers for the next 12 months might give us a distorted picture. Since last year, Nvidia has been capitalizing on a once-in-a-lifetime AI opportunity where there is tremendous demand, high pricing power, and little competition for AI chips.

Analysts expect Nvidia’s revenues to grow at a more down-to-earth 18% in the next fiscal year. The company is, however, quite upbeat about the long-term demand for its product, and sees opportunities in multiple end industries as well as geographies. Sovereign AI is another growth area for the Santa Clara-based company.

Ultimately, whether Nvidia is overvalued or not eventually boils down to the sustainability of its AI revenues, which in turn is dependent on demand from end users, as well as how competition shapes up.

That said, we have a quite recent example of the “digital transformation” bubble of 2020-2021 going bust in 2022, as the kind of growth that tech companies witnessed in these two years fell sharply – and in some cases, even turned into contraction.

As for Nvidia, while the stock could still rally from here, it might be prudent to take some profits off the table at these levels, as the kind of growth that Nvidia is currently witnessing might not be sustained beyond the next year.