Buying a high-priced stock can be tricky since there's always the risk you may end up buying it at or near its peak. And even though a business is growing, the inevitable question becomes whether the business is growing fast enough to justify its valuation.
Nvidia (NVDA 2.94%) is an excellent example of that. At a market cap of $2.8 trillion, it has become one of the most valuable stocks in the world. Its valuation is getting close to that of Apple and Microsoft, which are both around $3 trillion in market cap.
There's a lot of growth on the horizon for Nvidia in both the short and long terms. But given all the growth opportunities out there in artificial intelligence (AI), is the stock still a good buy right now? Let's take a closer look at just how much higher Nvidia's stock could go this year.
NASDAQ: NVDA
Key Data Points
What does Wall Street expect?
The consensus analyst price target for Nvidia's stock is currently $1,128. That suggests that Nvidia's stock has peaked and that it may be difficult for the tech giant to rally much higher from where it is right now. But analyst price targets typically look at where the stock will go within the next 12 months. If you're looking at the longer term, then there's the possibility that there could be more upside ahead.
Another thing to factor in is that analysts routinely update their price targets, and many have been upgrading their targets for Nvidia's stock. A year ago, Nvidia's consensus price target was around $380 -- which is around where the stock was trading at the time. A year ago, investors relying on analyst price targets could also have come to the conclusion that the near-term upside was limited.
Nvidia's valuation is a bit high based on its 10-year average P/E
An important metric for investors to consider is the price-to-earnings (P/E) multiple. At 67 times its trailing earnings, this isn't a cheap stock to own. But historically, over the past 10 years, Nvidia's stock has traded at an average P/E multiple of nearly 57, which is lower than where it is today.
NVDA PE Ratio data by YCharts
But based on its strong growth prospects, it doesn't appear that Nvidia's stock is terribly overpriced. The chipmaker is coming off yet another strong quarter last month, reporting 262% revenue growth for the period ending April 28.
Demand has taken off for the business and if Nvidia can continue to grow at a fast pace, its current valuation could still look cheap for some AI investors.
How high can the stock go?
Given the current hype and excitement about AI and the need for Nvidia's AI chips, it wouldn't surprise me if the stock overtakes Microsoft in valuation this year and climbs to at least $3.1 trillion, potentially rising by another 10% or more from where it is today.
At that point, I suspect investors may start to take a closer look at its valuation and questions may arise as to whether it is truly worth that high of a price tag. And that's when there might start to be at least some pullback.
Is it too late to invest in Nvidia stock?
Nvidia is generating impressive sales and profit numbers but it's not going to be tripling its numbers forever. At some point, there will be a period of slowdown, especially if the economy goes into a recession. As strong as the business is, there are factors outside of Nvidia's control that can adversely impact its operations.
At its current valuation, Nvidia's stock is effectively priced for perfection, and that makes it a bit of a risky buy right now. I'm not sure it can move much higher, at least in the short term.
There's no margin of safety for investors at this kind of a price tag, which is why, unless you're willing to hold on for several years, now may not be an ideal time to invest in the stock.
