In recent years, Nvidia (NASDAQ: NASDAQ) has been on an incredible streak. Nvidia stock is up 1,001% in five years. That is impressive – but has also meant that its valuation has been too expensive for me to want to buy any.
But the stock is down 13% over the past month. Meanwhile, ongoing strength in the firm’s financial performance means that the valuation has lately become more attractive.
Specifically, Nvidia’s stock price now sits at around 31 times earnings.
I’m getting tempted!
I do not have a hard and fast rule when it comes to what price-to-earnings (P/E) ratio is right for me when looking at possible shares to buy for my portfolio.
As a general rule of thumb though, anything higher than 20 can be enough to make me nervous.
There are exceptions.
One can be when a company’s earnings are moving around a lot, perhaps because of business volatility or simply because the business is growing its profits fast.
The latter is certainly true of Netflix. A single quarter’s earnings can only ever provide a snapshot of a company’s performance, but Netflix’s latest quarter is nonetheless illuminating. Diluted earnings per share were up by 86% compared to the prior year quarter.
That is consistent with the stellar revenue and earnings growth delivered by Nvidia over the past few years, as AI has led to a surge in demand for its proprietary chip designs.
If earnings per share keep growing – which in the short term I believe they will – then the prospective P/E ratio is currently in the twenties.
At that level, I am tempted to add Nvidia to my portfolio.
What am I waiting for?
So, what is stopping me?
In the short term I reckon Nvidia’s future is bright. Its order book is brimming.
But I see a medium-term risk to both revenues and earnings if the recent strong demand for AI chips starts to fizzle.
That could happen because of uneven business results from the heavy spending required for firms to scale up their AI, or a weakening economy leading them to tighten their purse strings.
As the best-in-class (and indeed only-in-class) supplier of many costly chips, Nvidia also faces a longer-term risk from rivals jostling to undercut it substantially on price with chips that are less powerful but still attractive at the price.
Still, even bearing that in mind, I am tempted.
Sticking to my risk-management principles
But while I feel upbeat about the long-term future for Nvidia, with its deep customer relations and proven technological prowess, that valuation does not compel me to act.
Is it better than before? Yes. It is attractive even when looking for a suitable margin of safety given the risks I mentioned above? On that point, I feel less confident. I do not want greed to override my judgement.
So for now, I will keep an eye on Nvidia’s business performance – and stock price.
Should you invest £5,000 in Nvidia right now?
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Christopher Ruane does not have positions in any of the shares mentioned.
