Nvidia (NASDAQ:NVDA) was one of the best performing large-cap stocks last year. Over the past year, the share price jumped by 141%, with the market-cap now a whopping $3.37trn.
Yet with all the accolades, there’s a good point being made by some that given the size of the existing move, further gains could be harder to come by. Let’s investigate.
Why the stock jumped so much
The rise of artificial intelligence (AI) has been a key factor in why Nvidia has done so well. More specifically, it’s benefited from generative AI technologies like OpenAI’s ChatGPT. This is because the graphic processing units (GPUs) Nvidia makes are critical for training and deploying AI models. Therefore, it’s currently the go-to provider for companies investing in AI infrastructure.
The huge demand for GPUs meant that financial performance in 2024 was exceptional, both in terms of revenue and profitability. The scale of growth can be seen from the latest quarterly results from November. For the fiscal Q3 period, revenue hit $35.08bn. This was up 94% from the same quarter the previous year!
A higher benchmark
Last month, I wrote about how 2025 could be harder for Nvidia. This isn’t purely based on the business having higher competition. Rather, the bar’s now set so high for financial performance and processor enhancements that it’ll be almost impossible to impress investors.
For example, take the 94% growth in revenue from November. If the next quarterly results show an increase of say 10%, I expect this could cause some panic from investors. Yet for most businesses, 10% revenue growth versus the last year would be something to celebrate.
These lofty expectations could hinder further growth potential for the stock. This could happen even though the business as a whole could keep growing and expanding.
Talking about valuations
With a price-to-earnings (P/E) ratio of 54, it’s not a cheap stock. This doesn’t mean that the share price can’t increase further, but it’s unlikely to repeat the same rally as the past year. For example, if the share price doubled but the earnings per share stayed the same, the P/E ratio would be over 100. In my view, that would be a red flag as a very overvalued stock.
However, Nvidia’s a very unique company. It really is the go-to business for anyone wanting to tap into AI. There’s still a huge amount of potential and adoption that still needs to happen in this sector. So the share price could keep rallying, being fuelled less by fundamental reasons and more by the desire by investors to not miss out.
I won’t be buying Nvidia shares right now. Although I think the company has more growth ahead, I feel there are more attractive AI stock options out there.
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Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended 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.
