It has been a merely gorgeous few years for Nvidia (NASDAQ: NVDA). Nvidia inventory has comfortably greater than doubled over the previous 12 months, shifting up 136%.

Over 5 years, although, the efficiency appears to be like much more spectacular. In that interval, the rise has been 2,150%.

So £20k invested in Nvidia early in 2020 would now be price £450k. Sure, £450ok. Wow!

However I didn’t purchase Nvidia shares 5 years in the past and by no means prefer to overpay for shares. So, earlier than even contemplating whether or not I feel Nvidia inventory can transfer greater from right here, can it justify its present valuation?

Huge, confirmed firm within the vanguard of giant change

I feel the reply, fairly probably, is sure.

When a small firm greater than doubles in valuation in a single yr, that’s one factor. However Nvidia has a market capitalisation of $3.5trn.

Which means an enormous quantity of good cash is invested within the share, on a grand scale. Now, that doesn’t imply there may not be plenty of dumb cash there too (or merely speculative cash). Nevertheless, it does seize my consideration that regardless of its already big scale, the corporate has managed to develop so sharply in valuation lately.

Nvidia has a confirmed enterprise mannequin and is vastly worthwhile, with robust revenue margins besides. Its proprietary chip expertise provides it an actual aggressive edge. Better of all,  it’s using a wave of AI spending that would really develop in years to come back.

Does that make its price-to-earnings ratio of 55 low cost?

I don’t assume so. Nevertheless it does clarify why Nvidia inventory could benefit that valuation (or perhaps a greater one), if potential earnings develop at something like their current clip. That would occur if AI gathers tempo and extra companies put money into it.

Frontier industries could be thrilling, however dangerous

So Nvidia is sort of a pioneer in a frontier city that’s doubtlessly set to blow up in measurement and wealth.

Nevertheless, as any fan of traditional westerns is aware of, frontier territories can even flip pretty nasty fairly quick.

That may be as a result of others come to stake their declare, a brand new sheriff (or regulator) rides into city, or the preliminary burst of heavy spending dries up and isn’t changed on something like the identical scale. I see all as dangers for Nvidia — if not essentially as we speak, then at the very least within the medium time period.

After I make investments, I prefer to have what Warren Buffett calls a margin of security.

I do assume that if the AI market retains heating up and Nvidia continues to fireplace on all cylinders because it has been currently, we may see the inventory price not solely preserve its present degree however doubtlessly transfer up strongly even from right here.

However as an investor, I don’t really feel snug that the present price gives me ample margin of security in case a number of the dangers I discussed above come to cross.

So,  for now, I’ve no plans to take a position.