This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Key Points
- Nvidia's size and its price-to-book ratio should concern investors.
- The company's massive revenue growth could help justify its stock price.
Given the performance of Nvidia (NASDAQ: NVDA) stock over the past few years, one could forgive casual observers for assuming it is in a bubble. The stock is up by around 1,500% from the cyclical bottom it sank to three years ago, and some of its valuation metrics may leave investors wondering if it is more than just "overvalued."
Still, investors also have to remember that its semiconductors are the foundation that the artificial intelligence (AI) industry has been built upon. With its chips still holding a dominant market share in the data center GPU segment, and with Nvidia unable to boost supply fast enough to match the current level of demand, investors should take a closer look at the stock before writing it off as being in a bubble.
The "bubbly" appearance of Nvidia
Nvidia's 1,500% gains over the last three years may give even more experienced investors some level of pause. Indeed, the magnitude of that climb should prompt investors to question Nvidia's growth and the danger of bubbles in general. For example, Cisco stock is still below the all-time high it touched in 2000, and silver just eclipsed its previous all-time high, which it achieved 45 years ago. Few investors can afford to wait out such price movements.
Another factor that increases the risk that Nvidia is in a bubble now is its massive size. Its market cap of around $4.4 trillion is the highest of any publicly traded company, surpassing the second-highest market cap, Microsoft, by more than $600 billion.
This situation puts its investors in a predicament. To double Nvidia's value, its market cap would have to rise to around $8.8 trillion. That might seem like a difficult feat when no company has yet reached even the $5 trillion market cap milestone.
Additionally, some of its valuation metrics point to the stock being in bubble territory. Its price-to-book ratio is 44. While it may not quite match Palantir's lofty price-to-book ratio of 70, it is well above the S&P 500 average of 5.5.
Other aspects of the business may point toward trouble for the share price. Nvidia depends heavily on Taiwan Semiconductor (TSMC) to manufacture its chips, and most of the foundry giant's capacity is in its native country. That leaves Nvidia vulnerable if geopolitical tensions between China and Taiwan heat up.
Also, its accounts receivable are up 97% over the last year, while its inventory is up 122%. If those do not convert to cash and deliveries, respectively, Nvidia stock could experience a notable reversal of fortune.
Why the bubble talk could be overblown
However, in other respects, Nvidia's numbers seem to back up its growth narrative. Accounts receivable and inventories have risen because revenue grew by 62% in the first half of its fiscal 2026, which ended July 27.
Interestingly, its cost of goods sold surged 131% higher over the same period, an indication of how expensive it has been for the chip designer to try to keep up with demand. Investors should note that its net income in the first half of its fiscal 2026 still grew by 43% year over year to $45 billion.
Nonetheless, it's worth noting that its top line surged by 121% in the first half of its fiscal 2025, so its revenue growth is slowing. Companies with decelerating revenue increases tend to get punished by the market, even when that "slower" growth remains relatively rapid.
Fortunately for Nvidia bulls, the company's P/E ratio could put an effective floor under any share price correction. Yes, its current P/E ratio of 52 is well above the S&P 500's average of 30. Still, its forward P/E ratio of 40 is much closer to that average, especially when considering the company's rapid revenue and profit growth. More importantly, the company's P/E ratio is not at the stratospheric levels commonly seen in tech growth stocks. That would appear to undermine the argument for Nvidia being in a bubble.
Is Nvidia stock in a bubble?
Despite the steep increases in its stock price and its high price-to-book ratio, Nvidia is probably not trading in bubble territory.
Its valuation has likely gotten somewhat ahead of its actual growth. Additionally, its massive market cap could create a brutal headwind for shareholders, as could its dependence on TSMC.
However, considering its 62% revenue growth this year and its recent history of triple-digit-percentage revenue growth, Nvidia is clearly benefiting from trends that can justify a premium P/E ratio. Moreover, its P/E ratio is less than two times the S&P 500 average, and its forward P/E ratio is at a level where the company's growth could quickly bring its earnings multiple back toward that average.
Based on those metrics, Nvidia looks like it's closer to being a value stock than a bubble stock. Although investors should not expect another 1,500% gain over the next three years, Nvidia should continue to outperform the market.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
