The big picture: The world has gone mad for AI. Setting aside what the latest AI models are actually good for, it is not surprising that investors are looking for stocks with "AI exposure." Unfortunately, this turns out to be a fairly short list at the moment, and at the top of that list is Nvidia.

Nvidia has largely captured all the market for chips used for training AI models and is also performing well with chips for inference. The company is strategically well-positioned, which is reflected in its stock price, currently trading at 167x trailing twelve months earnings and 67 times this year's estimated EPS. These are significant multiples that may give many investors pause.

Editor's Note:
Guest author Jonathan Goldberg is the founder of D2D Advisory, a multi-functional consulting firm. Jonathan has developed growth strategies and alliances for companies in the mobile, networking, gaming, and software industries.

While Nvidia is unquestionably the leader in the hottest new market, and there are no signs of anyone challenging their dominance, it's important to note that the company has experienced boom/bust swings throughout its 40-year history. Although their CEO has done an incredible job in bringing them to this point, combining deep technical understanding, a keen strategic mind, and eloquence to convince others of their vision, the Street has often become overexcited about their numbers, often just before a major inventory correction. There are currently no signs of a downturn, but, to put it politely, Nvidia sometimes struggles to accurately forecast its end markets and effectively communicate its expectations to the market.

So what is Nvidia worth?

A big part of the disconnect right now is that for the first time Nvidia's strong market position is based on software more than its hardware. For years, the company had to compete with AMD for leadership in the GPU Feeds and Speeds race. Nvidia emerged as the winner in most of those contests, but there was always some competition to challenge them. The AI market is different. Nvidia has maintained its lead thanks to its CUDA software. Although not an operating system per se, CUDA's ubiquity and relative ease of use have made it the de facto common software layer for AI software meeting silicon.

A big part of the disconnect right now is that for the first time Nvidia's strong market position is based on software more than its hardware.

AMD has never had anything to rival CUDA, and from what we can tell they are not even trying. While there are software libraries attempting to displace Nvidia, these are owned or largely supported by software companies that don't care enough about the intricacies GPU firmware intricacies to create a true alternative. Perhaps a few years of near monopoly could change that, but currently, there doesn't seem to be anything on the horizon.

Considering Nvidia's software as their true competitive advantage, should they be viewed as a software company? This idea may seem mildly outlandish but is worth considering. We conducted some rough comparisons for Nvidia's stock, which are shown in the table below.

  Share price (5.8.23) FY1 EPS FY2 EPS FY1 PE FY2 PE
NVDA 291.51 4.53 6.05 64.4x 48.2x
AMD 95.04 2.55 3.66 37.3x 26.0x
QCOM 108.31 8.38 9.77 12.9x 11.1x
MRVL 41.01 1.52 2.3 27.0x 17.8x
CRM 197.9 6.36 7.92 31.1x 25.0x
MSFT 308.65 9.67 10.92 31.9x 28.3x
ADBE 344.06 13.83 15.7 24.9x 21.9x
SNOW 160.42 0.6 1.01 267.4x 158.8x
DDOG 78.54 1.18 1.56 66.6x 50.3x
AAPL 173.5 5.32 5.85 32.6x 29.7x

Nvidia is already trading at more than double the value of its large-cap semiconductor peers. It also carries a hefty premium compared to large-cap established software companies like Microsoft, Salesforce, and Adobe. The closest comparable group would be new, high-growth software companies like Snowflake and Datadog. That is an impressive peer group.

While the Street expects Nvidia's earnings to double over the next two years, Snowflake's earnings are projected to double in just one year. If Nvidia traded at Snowflake's multiple, the stock would be worth approximately $600, more than double its current price of $291. The fact that we are even considering a company like Snowflake in this discussion is enough reason to raise serious questions about Nvidia's valuation.

Another way to think about Nvidia is by comparing it to companies that monetize their unique software through hardware sales, such as Apple. Some may argue that the two companies are very different, but conceptually, they share the commonality of hardware prices with software differentiation. However, even Apple trades at a discount of almost 40% compared to Nvidia.

As much as we believe Nvidia is executing incredibly well, it is difficult to feel comfortable with the current share price.