I saw it this week Nvidia (NASDAQ: NVDA) has once again broken its own record. Nvidia stock has hit a modern all-time high, which means it’s currently holding there 1299% higher than it was five years ago.

When you look at this type of growth combined with a price-to-earnings (P/E) ratio of 55, it’s straightforward to assume that the stock must be overvalued.

In practice, however, this cannot be determined based on the history of the stock and the current P/E ratio. Rather, I think valuation is about looking at what the company is future prospects and then compare them with the current price.

Nvidia is in uncharted territory

In the case of Nvidia, this can be challenging.

After all, Nvidia’s stock has soared over the past few years, in part because its sales revenue and profits have exploded. Not only is the stock price at a level it has never been before, but so is Nvidia’s business.

If this were a one-off phenomenon as huge companies rush to install AI-related IT infrastructure, Nvidia’s current stock price might be too high to justify over the long term. This may mean that it is heading for decline.

However, if the last few years of AI demand are just the beginning of things to come, this could be good news for Nvidia.

Its revenues and profits may augment further. It has recently managed to grow profits above revenues, and economies of scale could mean this continues.

If this scenario comes to pass, in five or ten years we may look back at Nvidia’s stock price today and consider it a great bargain!

Dealing with the unknown

This kind of ambiguity is to be expected to some extent. After all, investing in the stock market always involves analyzing the future performance of companies. In reality, this is never certain, even in the most prestigious company.

But with Nvidia, there are a lot of moving parts.

On the one hand, I see there’s a lot to like.

Nvidia’s equity-driven business model and proprietary chip designs mean it has been able to achieve high profit margins. I see it as something that can continue.

Moreover, it already has a huge installed user base. This could be a competitive advantage if AI sales continue to grow, not only thanks to repeat purchases but also the power of this installed base in helping modern customers choose Nvidia chips.

What could happen now?

On the other hand, we simply don’t know how sustainable current demand for Nvidia chips is, let alone whether there is significant room for continued growth at even current levels.

The company faces regulatory pressure in key markets such as the US and China. Smaller rivals are racing to produce cheaper chips that could offer some of what Nvidia offers, threatening both the industry leader’s sales revenue and profit margins.

For the right price, I could live with that risk. However, given how highly Nvidia’s stock is currently valued, I don’t think there’s enough of a margin of safety. So, while I think there may still be some way to climb, I’m not willing to invest at the current level.