This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Nvidia (NASDAQ: NVDA) remains one of the best artificial intelligence (AI) stocks on the market. But with the chipmaker now trading at a price-to-sales multiple of 26.4, many investors may wonder if shares have gotten too expensive to buy. Don't be fooled: Nvidia stock is still reasonably priced.
Nvidia stock isn't as expensive as it seems
Nvidia designs graphics processing units (GPUs) that provide the processing power required to support modern AI and machine-learning software. The company's gross margins are around 60% -- nearly twice those of competitors like Intel -- a reflection of how superior its cutting-edge chips are compared to the offerings of rivals. Nvidia can simply charge more for its products due largely to their performance superiority, as well as the value of its widely used software platform, which makes it easier for developers to program chips for specific tasks.
Nvidia's hardware is essentially powering the AI revolution: Most analysts believe it has an 85% to 90% market share in AI accelerator chips right now. Because AI infrastructure spending is expected to grow by more than 30% annually through 2033, Nvidia has the potential to grow its sales base aggressively over at least the next decade, and likely beyond.
Due to investors' optimism about all of this, its shares trade at a pricey 26.4 times sales. But when you measure the stock against the company's profits and bottom-line outlook, the valuation picture improves considerably.
Data by YCharts.
Nvidia shares currently trade at roughly 51 times earnings. That's still quite a premium. But because earnings are growing so fast, shares trade at just 36.9 times next year's earnings. If it can maintain its high gross margins, the stock's valuation could continue to improve dramatically year after year due to its rapid sales growth. Compared to a competitor like Intel, which lost money in each of the last three quarters, Nvidia's valuation looks quite reasonable.
To be sure, shares aren't cheap, and the stock just hit the $4 trillion market cap threshold. But for patient investors willing to pay an up-front premium, they could still prove profitable.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
