Is it too late to buy Nvidia stock?

From the beginning of 2024 Nvidia‘S (NVDA 0.69%) The stock is up about 150%. After that run, many investors assume they missed an opportunity and the stock can’t go any higher. The problem is, that same thinking is why they didn’t buy the stock after it went up 50% or 100%.

Similarly, Nvidia stock is up nearly 750% since the start of 2023. Despite the stock’s significant gains, every day in 2023 has been a fantastic buying opportunity. There’s a natural instinct called price anchoring, where your mind latches onto a price you might have paid in the past.

Investors need to look at the assumptions embedded in Nvidia stock and decide: Can it go up in the future? If those assumptions are reasonable, then it may not be too late to buy Nvidia stock.

Nvidia’s revenues and profits are at record levels

Nvidia’s growth is tied to its core product: graphics processing units (GPUs). GPUs are used in high-performance computing applications because of their ability to process many calculations in parallel. Without this ability, little of the innovative artificial intelligence (AI) technology we see today would be possible. As the AI ​​race continues, everyone in the competition is buying as many Nvidia GPUs as they can, which is why the stock is doing so well.

Nvidia reported tripling its revenue in three consecutive quarters, sending its stock price to a record high.

NVDA Quarterly Revenue Data by YCharts

Since Nvidia already had the manufacturing capabilities to produce these GPUs, its margins also increased drastically due to unit economics.

NVDA Profit Margin Data (Quarterly) by YCharts

When determining where Nvidia stock might head next, investors need to consider whether the company will be able to continue growing and maintaining its top-tier profit margins.

The stock is not cheap at the moment, but its valuation could increase

Nvidia’s revenue growth is a bit complicated. First, Nvidia has historically been a cyclical company. That means the company goes through ups and downs in demand. Demand is extremely high right now, but the question is whether it can stay high for years. Given the amount of AI infrastructure that has yet to be built, many investors believe Nvidia can consistently deliver high revenue levels. Additionally, data center GPUs have a lifespan of about five years, so they’ll need to be replaced around that time. When that happens, it will trigger another wave of demand for Nvidia’s GPUs, which could help it maintain or increase revenue.

Nvidia’s margins are also suspect. Because they’re so high, some companies want to undercut Nvidia and design AI-specific GPUs or processing chips in-house. This threatens both Nvidia’s revenue and margins, but the problem is that these products are very specific to a particular use case. Nvidia’s GPUs excel at a wide range of computing types, so they’re likely to remain incredibly popular.

While these are undoubtedly challenges, the current results clearly favor Nvidia.

Now we need to see what expectations are built into Nvidia stock. At 71 times prior year earnings, Nvidia stock is very expensive.

NVDA PE Ratio Data by YCharts

Since Nvidia is a top-tier company with excellent margins, it’s not unreasonable to expect the stock to have a long-term multiple of 30x prior-year earnings. If we use that multiple as a base case, Nvidia would need to grow its earnings to $100 billion to meet that criteria at its current valuation.

Wall Street analysts are expecting revenue of $165 billion in fiscal 2026 (ending January 2026). If Nvidia maintains its 57% profit margin, that would net $94 billion in profit, which is right where it needs to be to hit my valuation target.

That’s about a year and a half of growth already factored into the stock. But the question is, is that price worth it? If Nvidia’s growth lasts five years, it’s definitely worth it. If not, investors could be in for a rude awakening.

However, all indications are that the AI ​​trend won’t end in a year and a half, which means it’s not too late to buy Nvidia stock.

Keithen Drury has no position in any stocks mentioned. The Motley Fool has a position in Nvidia and recommends it. The Motley Fool has a disclosure policy.