NVDA Stock Valuation Analysis: What Is Nvidia Really Worth?

By any conventional measurement, the current market valuation of Nvidia (NASDAQ:NVDA) stock looks ridiculous.

At $288 per share, you’re paying 167 times earnings. The yield on the 4 cent/quarter dividend is 0.06%. (That may be less than your checking account.)

You’re paying 19 times next year’s expected earnings to own it.

It’s true that I own some. I got in five years ago, sold enough to cover the costs, and didn’t look at it again. Over the long run, Nvidia is not a stock you buy or sell. It’s something you own, like Apple (NASDAQ:AAPL).

A better question might be, what should NVDA stock be worth today? Also, what do we call the “excess” valuation?

The Druckenmiller Thesis

Stanley Druckenmiller is one of the brightest guys on Wall Street. The record of his Duquesne Fund is legendary. He closed it in 2010 and now runs it as a “family office.”

Druckenmiller just bought NVDA stock. He bought $200 million of it. His family office also bought Microsoft (NASDAQ:MSFT), which may be just as overvalued. The investment was made, he said, because he wants to be in the long-term leaders of Artificial Intelligence (AI) as it prepares to take over the world. Over the near term he’s bound to get burned.

Druckenmiller’s heirs can afford a defensive play. The trouble is the leaders in tech are seldom the companies you expect. I think he’s buying IBM (NYSE:IBM) in 1981, or Cisco Systems (NASDAQ:CSCO) in 1999.

Microsoft didn’t emerge for years after the PC came along. Meta Platforms (NASDAQ:META) wasn’t even founded until 2004.

Speculative Value

Investors are betting that Nvidia sales will explode over the next two years, by 25%, at scale, with profit growth to match. The fundamental value for a stock growing sales and profits 25% per year could be 10 times current sales, even 50 times earnings.

Right now Nvidia is trading about where Amazon (NASDAQ:AMZN) did at its 2021 high. It’s down over one-third since then.

What remains, beyond the fundamentals, is what I call speculative value. It always exists, in a fast moving market. There’s fear of missing out, along with assumptions about fundamental changes coming in technology and the economy.

Such changes are happening under the surface. Look at the changes just since 2000, or look at your phone. Ask Google, Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) was in its infancy then. Amazon was a bookstore in the year 2000. Streaming was still something trout fishermen did. Clouds were all in the sky.

Nvidia is Worried

Over at Nvidia, CEO Jensen Huang is worried. He just took a 25% pay cut. Nvidia’s flagship gaming cards aren’t selling the way they were. The Bitcoin mining boom is over. Apple, Amazon, and Alphabet are starting to make their own Graphics Processing Units (GPUs). Nvidia’s best customers are competing with it.

That’s why Huang is talking up AI. It’s not just for replacing writers and graphic artists, he says. AI can make chips faster and better. Getting Nvidia chips into the hands of those who make its chips open huge new markets.

AI will do its best work in manufacturing and the Intranet of Systems. It makes investing in robots make sense.

The Bottom Line

I believe in Nvidia, and the promise of AI. I believe Nvidia chips will play their part, increasing human productivity as the decade goes forward.

But Nvidia won’t be the only winner. It won’t even be the biggest.

The biggest winners here will be software companies, some of which don’t exist yet. They will work under the surface, in factories, in hospitals, in our infrastructure. Some of this will be powered by Nvidia hardware. Just not all of it.

Nvidia is a marker for this future AI world, but don’t fall in love with the stock. Don’t overpay. It will come down to a buying range again. It was at half its current price in January.

On the date of publication, Dana Blankenhorn held long positions in AAPL, GOOGL, AMZN, MSFT, and NVDA. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.