The Nvidia share price hit an all-time high this week. But could it still be a bargain?

If one thing has a $4trn price ticket, it may not seem to be an apparent discount. However after the Nvidia (NASDAQ: NVDA) share worth hit an all-time excessive over the previous week, the chip firm turned the primary in historical past to attain such a excessive market capitalisation.

Nevertheless, regardless of its meteoric rise (the Nvidia share worth has surged 1,466% in simply 5 years), might this nonetheless be a possible discount for my portfolio?

One of the best should be forward

Maybe surprisingly, I reckon the reply is likely to be sure. Even at its present worth, Nvidia might but develop into a long-term discount.

That’s as a result of it has a robust place within the AI race that might develop into each lengthy and extremely profitable.

We have now already seen the large profit Nvidia has reaped from promoting its proprietary chips to a big present buyer base as purchasers search to ramp up their AI capabilities. In the newest quarter, Nvidia’s revenues soared 69% in comparison with the identical interval final 12 months, reaching $44bn. Internet earnings was up 26% 12 months on 12 months to $19bn.

These figures are fascinating for just a few causes.

First, they clearly display monumental development. Secondly, they’re substantial – Nvidia isn’t just some small startup, however an enormous enterprise that’s already producing severe cash.

Additionally, with the web earnings equalling 43% of income, Nvidia’s revenue margins are mouth-watering.

If Nvidia can construct on this success, for instance by deepening present consumer relationships whereas AI chip demand grows, it might develop into but extra worthwhile down the road. That might push the Nvidia share worth up even from its present stage.

Right here’s my concern

Nevertheless, whereas I see the reason why the share might maintain transferring up, I’m nervous in regards to the present valuation.

On a price-to-earnings ratio of 53, the valuation doesn’t provide me the kind of margin of security I would love as an investor.

Earnings development at Nvidia has been phenomenal over the previous few years. However there are dangers that might harm future development prospects, from intense competitors to tariff disputes involving a few of Nvidia’s key markets.

Not solely that, but it surely stays anybody’s guess how sustainable the demand for pricey AI chips will likely be after the preliminary large spending spherical is over.

A lot of long-term uncertainty

Seen positively, AI demand might surge, that means that even the kind of revenues we’ve got seen from Nvidia lately are simply the tip of the iceberg.

Contemplating another  situation, nonetheless, it might be that elevated capability mixed with decrease promoting costs sees the underside fall out of the AI chip market sooner or later.

Even when demand is excessive – and that continues to be to be seen – pricing might drop to the extent the place revenue margins are far thinner than at the moment. Which will appear far-fetched now, however it’s the dynamic we’ve got seen over time in lots of fast-developing markets, from dwelling computer systems to cellphones.

All issues thought of, then, I like Nvidia as a enterprise and assume if chip demand retains booming, the share worth might observe. However the present worth doesn’t sit comfortably with me from a threat administration perspective. I cannot be investing for now.