NVIDIA (NVDA -0.29%) shareholders have been benefiting mightily from the ongoing chip shortage, as well as from the popularity of the company's offerings for GPU-based applications. The chip stock has rallied by nearly 240% since January 2020.
The magnitude of that surge has plenty of investors questioning whether there's still a chance to buy in, or if they have essentially missed out on their opportunity to profit from this particular rally. Let's take a closer look at NVIDIA and attempt to provide an answer.
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The state of the stock
NVIDIA's share price has increased by just over 100% in the last 12 months, and its scheduled four-for-one stock split is less than two weeks away.
That stock price surge has taken NVIDIA's P/E ratio to almost 95. The stock has not seen such high valuations since the early 2000s. Moreover, when NVIDIA rallied in late 2016 and early 2018, P/E multiples above 50 amounted to sell signals -- the stock plummeted soon after hitting those levels.
Additionally, it has become expensive compared to its peers. Archrival AMD sells for under 40 times earnings, Qualcomm trades at 20 times earnings, and Intel sports a P/E ratio of less than 13.
Competitive advantages
On the positive side, NVIDIA possessives competitive edges in a number of tech niches. It has gained traction in the cryptocurrency space with a popular and powerful GPU specifically designed for mining digital tokens. It has built a presence in the realm of supercomputers -- its Cambridge-1 supercomputer will be used by businesses and academics to accelerate research in healthcare and genomics. Furthermore, assuming its proposed acquisition of Arm Holdings goes through, it could further widen its competitive moat, as many manufacturers use Arm's chips in devices such as digital TVs and smartphones.
And its longtime core products -- GPUs for video gaming -- are helping it foster innovations in the growing market for artificial intelligence systems. Its chips will power key applications in self-driving cars, data centers, and cloud computing, among others. Additionally, its AI-on-5G platform will also aid in deploying AI-based applications across 5G networks.
Financials and outlook
Given these innovations, investors can easily understand how NVIDIA's successes have boosted its financials. In its fiscal 2022 first quarter, which ended May 2, revenue rose 84% year over year to $5.66 billion. This included a 106% increase in gaming revenue and a 79% surge in data center revenue.
That lifted its GAAP net income by 109% to over $1.9 billion. Slower growth in operating expenses along with a boost in earnings from unrealized gains contributed to the bottom-line gains.
That performance for the most recently reported quarter also outpaced NVIDIA's results for its full fiscal 2021, when revenue rose 53% and GAAP net income increased 55%.
The company saw nearly $1.6 billion in free cash flow in the latest quarter, and close to $4.7 billion in fiscal 2021.
Nonetheless, its outlook may give investors pause. For its fiscal Q2, the company expects revenue to be within 2 percentage points of $6.3 billion, a massive increase from the $3.9 billion it reported in the same quarter last year. However, the company declined to offer an outlook for the remainder of fiscal 2022. This could reflect management's uncertainty about macro conditions as global economies attempt to emerge from the shadow of the pandemic.
Should I still consider NVIDIA?
Although the company's long-term growth story could easily continue, investors may want to avoid NVIDIA stock for now. Management's decision not to provide an outlook beyond Q2 indicates it could hit a rough patch ahead. Moreover, it doesn't appear wise to pay almost 95 times earnings for this chipmaker under current conditions, especially when the stock rarely traded at a P/E ratio above 50 before 2021. While it may not be too late to buy NVIDIA stock, investors should probably assume that they have missed out on the chance to benefit from this rally.
