NVIDIA is 'expensive' for a reason. Don't let it slip by

Key Points

• NVIDIA stock has been considered 'expensive' for quite some time, but then again, so is the whole semiconductor industry. 
• There is a good reason why this stock is trading at the highest forward P/E in its peer group, and analysts know this. 
• Data suggests there is a lot more room to move up in this name; will you take advantage?

The stock market is the ultimate emotional and intellectual challenge. You can develop skills beyond most people's understanding, such as making independent judgments on a situation, even if it means going against your bare instincts. Today, NVIDIA NASDAQ: NVDA trains that contrarian muscle in your brain.

NVDA stock has been "expensive" for quite some time, as judged by its higher-than-average price-to-earnings ratio. For that reason, most investors looked to steer away from the name altogether, waiting for the day they could buy it for a more reasonable valuation. However, as the saying goes, it must be expensive for a reason.

For reasons you will soon become familiar with, this stock, which has beaten the S&P 500 by as much as 228% on a year-to-date basis, still has a lot of room left to move up. So do yourself - and your portfolio - a favor and strap in. Ready, set, go!

Outliers take the podium

The world is somewhat mathematical, and in true statistical beauty, outliers typically are the ones to reap the rewards. When it comes to technology stocks, finding the outliers can also bring you sensible opportunities to multiply your wealth. Starting with the way the market is perceiving the sector today.

Because there is a lot of bullish momentum in the sector's price action, as judged by the VanEck Semiconductor ETF NASDAQ: SMH and its stellar 61.0% performance on a year-to-date basis, you can safely assume that most stocks in this sector are going to be counting on similar momentum.

So, how else can you determine whether NVIDIA is an outlier here or not? Using every banker's favorite word: Valuation. Basing your stock screener on a forward P/E basis, you can gauge where the markets value the next twelve months of earnings in a stock.

This industry carries an average forward P/E of roughly 20.9x, so anything far above - or below - this benchmark can count as an outlier, which you can then interpret as a bullish or bearish sign.

You can also take some of NVIDIA's biggest competitors, names like Intel NASDAQ: INTC and Micron Technology NASDAQ: MU, into comparison. While you can do all the comparing you want in just a bit, it is time to check where NVIDIA stands in this list.

Being valued at a forward P/E of 30.4x means that NVIDIA stock is valued at a 50.4% premium to the industry, all for good reason. Intel and Micron don't stand a chance against the king; its latest earnings results only help it keep this status.

But wait, there's more

According to the company's second-quarter 2024 financial results, there is nothing but clear skies ahead for this stock. Considering that the business generated record revenue of $13.5 billion, it has more than doubled over the past twelve months.

It is no wonder, then, that this is the most 'expensive' stock in the industry. In other words, the one company for which markets are willing to pay a premium price? But what exactly is driving investors to be so comfortable overpaying for just another semiconductor company? The answer is in the earnings.

The business grew its EPS by an obscene 854% over the year, and analysts are still expecting this stock to push out another 59.3% bump in the next twelve months. Seeing how explosive the earnings growth can be only further justifies its valuation.

This dynamic and expectation directly translates into how analysts think about this stock. They have assigned it a consensus price target of $571.5, meaning there is a net 15.0% upside from today's prices. Competitors did not get so lucky.

Intel analysts see a 20.3% downside from where the stock trades today, which is pretty insane considering this is one of the crowned jewels of the sector, but then again, you can't argue with NVIDIA's takeover. 

While not as bearish, Micron analysts only point to a mere 1.4% upside in the stock, nothing to write home about. This could explain why the market values this stock at a 14.2x forward P/E or a 30.0% discount to the industry average.

If you need more statistical backup, just keep in mind that NVIDIA stock is trading at its 52-week high this week, meaning that most of the bid and ask is being dominated by all the bulls aware of how high EPS can be soon. 

Will you be part of this wave or share a coffee on the sidelines with every other investor who thought this stock was too 'expensive'?