Which company is winning the artificial intelligence (AI) arms race? As a developer of the hardware that’s needed to drive AI applications, the emerging winner is definitely Nvidia (NASDAQ:NVDA). Nevertheless, cautious investors should sit tight and wait for NVDA stock to come down to a more reasonable price point.
OpenAI ushered in the generative/conversational AI revolution in 2023 with its ChatGPT chatbot. Nvidia certainly isn’t trying to compete with OpenAI and other software developers.
Yet, there’s still a place for Nvidia in the generative AI boom as chatbots are often power-intensive. As a tech hardware manufacturer, Nvidia is carving out a lucrative niche for itself. Yet, this doesn’t mean prospective investors should hit the “buy” button right now.
Nvidia Dives Headfirst Into Generative AI Hardware
Nvidia is famous for making graphic processing units (GPUs) for use in the gaming and personal computer (PC) markets. In recent months, however, Nvidia has emerged as the king of AI hardware.
For instance, Nvidia offers a chip called the A100, which can provide the vast computational power that generative AI platforms require. But that’s not all, as Nvidia is also advancing best-in-class DGX supercomputers.
Nvidia CEO Jensen Huang described DGX supercomputers as “modern AI factories.” Moreover, Huang stated that these supercomputers “are now running 24/7 at businesses across the world to refine data and process AI.”
Additionally, Louis Navellier recently took note of Nvidia’s L4 Tensor Core GPU for AI applications. This GPU “offers AI video solutions, with more than 120X times the AI-powered performance of regular CPUs.” Yet, even while it’s quite powerful, the L4 Tensor Core GPU is 99% more efficient than a regular GPU.
NVDA Stock’s Valuation Is Stretched
So far, we’ve established that Nvidia is dominating the niche market for AI-compatible hardware in 2023. Bear in mind, however, that the stock market is aware of everything we’ve discussed here. Plus, the market tends to take all available information and immediately price it into stocks.
Analysts also tend to front-run stock moves. For example, Piper Sandler analysts placed an optimistic $300 price target on NVDA stock. However, value-focused investors should observe that the stock has already gone on a massive bull run this year.
The result is a stretched valuation. Nvidia’s GAAP trailing 12-month price-to-earnings (P/E) ratio of 153.78x drastically exceeds the sector median P/E ratio of 23x. The same thing could be said about Nvidia’s trailing price-to-book (P/B) and price-to-sales (P/S) ratios.
The Best Approach With NVDA Stock
Nvidia will undoubtedly generate robust revenue as the company commercializes hardware designed for AI applications. On the other hand, the market is fully aware of this. It’s likely that investors have already priced in Nvidia’s dominance in the AI hardware niche market.
This doesn’t mean anyone should bet against Nvidia. Instead, you can choose to be patient and wait for NVDA stock to pull back to a more reasonable price point, such as $220. Then, you can hit the “buy” button as Nvidia shares will offer both a good value and excellent growth potential.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.