NVIDIA's Unprecedented Valuation Surge and the Future of Chipmaking

The 16% jump in NVIDIA's share price following Wednesday's positive earnings report has taken the investment community by storm. Friday's closing price, $788.17, reflects a record-breaking valuation gain of $276 billion that now puts the company's market cap at just under $2 trillion. This makes NVIDIA the third largest company in terms of market capitalization behind Apple and Microsoft, which is a fascinating figure considering how recent its substantial valuation gains have been. With so much hype and excitement surrounding NVIDIA and the rest of the chipmaking industry, several debates have broken out, such as whether these companies are fairly valued or if there could be a repeat of the dot com bubble that occurred in the late 1990s. At the end of the day, it all boils down to one question that determines the value of every company's stock price: what does the future hold for NVIDIA?

There are many factors that must be considered when looking at NVIDIA's outlook. Starting with the more macro elements, one must give thought to the course of interest rate cuts. As we've seen, inflation continues to be stickier than anticipated, causing the Fed to push back rate cuts deeper into the year. It is fully feasible that these will continue to get pushed back more and more, drying up investment and economic growth to a greater degree than expected. Foreign relations play a critical role as well. With chip exports to China being forbidden by the US government, China is likely pouring large amounts of capital into the development of comparable, or possibly even more powerful chips that could rival what NVIDIA produces. If China is able to achieve this, NVIDIA will likely struggle under the increased competition and could lose its stance as the top chipmaker in the world. However, this is not something that would likely happen anytime soon, which gives NVIDIA a huge advantage in capturing more market share with its first mover advantage.

While NVIDIA's position in the industry is extremely strong, there are still many arguing that its stock price is overvalued. In looking at the price-to-sales ratio, the chipmaker's figure is at 32, which is quite high. Since ratios of this caliber entail a high expectation for rapid growth, NVIDIA's quarterly earnings need to continue increasing at very high rates. Although NVIDIA has been able to do this so far, many speculate that this is unsustainable—eventually the growth will plateau. However, some believe that this rapid growth is here to stay for years. The AI boom that has taken the world by storm since 2020 has sparked massive demand for the chipmaker's technology, and as we saw from last week's earnings report, the demand is continuing to severely outpace supply. Looking at it from this angle, one could argue that NVIDIA is actually undervalued and that more growth should be expected.

source:https://fullratio.com/stocks/nasdaq-nvda/pe-ratio

While determining NVIDIA's true valuation is a tricky task at this stage in its growth, one thing cannot be denied—the company has gained a huge amount of attention. As our world enters its next stage of technological advancement, the chip making industry will take center stage as the key enabler of innovation and production. That is something that is guaranteed. What isn't known is who will dominate that space. Will NVIDIA permanently seize the crown of chipmaking, or will it wither away and be forgotten as an overvalued, AI boom stock? Like almost always, only time will tell.