Here’s why I think Nvidia stock still looks cheap, and why I won’t buy it
Nvidia (NASDAQ: NVDA) stock dipped 2.5% Monday morning (15 September), after China declared the AI chip giant broke antitrust law with the acquisition of Mellanox in 2020.
It takes more than that to knock Nvidia off track, and it quickly bounced back. The company still has a market cap around $4.3trn.
It’s probably just a bit of political posturing anyway, as delegations from the US and China meet in Spain to continue talking trade.
AI bubble?
Something else makes me nervous about Nvidia though. And nervous of the entire AI business, in fact.
OpenAI CEO Sam Altman summed it up recently. He said: “Someone is going to lose a phenomenal amount of money in AI.”
Company chair Bret Taylor has followed that up: “I think it is both true that AI will transform the economy, and I think it will, like the internet, create huge amounts of economic value in the future.”
Like the internet? So a bit like the dotcom bubble of 1999, you mean? He added: “I think weâre also in a bubble, and a lot of people will lose a lot of money. I think both are absolutely true at the same time, and thereâs a lot of historical precedent for both of those things being true at the same time.“
He pointed out that a lot of dotcom companies crashed. But “all the people in 1999 were kind of right.“
Valuation, valuation
Let’s turn to the valuation of Nvidia stock. We’re looking at a forecast price-to-earnings (P/E) ratio of 41 for the 2025/26 year. And that might seem a bit steep.
But it’s nothing compared to the stupidly high multiples some of the early internet stocks reached. Some didn’t even have a price-to-earnings ration (P/E) because they weren’t making profits — and a good few never did.
Nvidia’s P/E would drop to around 25 by 2028 if broker forecasts come good. Would that be too high? You’ve got to be joking, right? If Nvidia chips are still powering the leading edge AI developments, I reckon a valuation like that could be a steal.
So why won’t I buy now?
Every day I see the Nasdaq inch higher — it hit five closing all-time highs in the week ending 12 September — I get a bit twitchier. My fear that we’ll see an AI shake-up grows that much higher too.
Good with the bad
Remember Amazon in dotcom days? From the high it reached in December 1999, Amazon lost 95% of its value by September 2001. As it happens, Amazon turned out to be one of the winners and has since gone on to multi-bag even from its dotcom high.
But when the crash happened, the very best suffered along with the no-hopers.
I see a good chance Nvidia could turn out to be the Amazon of the AI boom. And I can see myself wanting to buy in the future. But for now, I’ll hold back and wait for any potential loud pop sounds to fade. Being “kind of right” isn’t enough.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Amazon and Nvidia. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
