Masayoshi Son is one of the most famous investors in modern history. As CEO of Japanese holding company SoftBankSon has a rich history of making wise investments across a multitude of different industry sectors.

Sure, there have been a few glitches in SoftBank’s portfolio (I’m looking at you, WeWork), but for the most part, Son seems to have a knack for identifying transformative technologies before they take off.

Take the semiconductor sector Arm holds as an example. In 2016, Softbank acquired Arm for approximately $32 billion. Today, Arm is a public company and has a market capitalization of nearly $150 billion. That’s a pretty solid return on investment.

Speaking of semiconductors, Son recently made an eyebrow-raising remark regarding the world’s most valuable microchip sector: Nvidia (NVDA 2.27%). During a recent interview with CNN’s Richard Quest, Son put forward the idea that Nvidia is undervalued.

How can a stock that has gained 880% in two years be considered undervalued? Below, I’ll explain why Nvidia stock may seem undervalued, but explain why I don’t completely agree with Son’s call.

Why Nvidia seems undervalued

For many years, Nvidia focused primarily on the video game industry, particularly on improving the visuals and graphics on computer displays for gamers. However, over the past couple of years, Nvidia has found a way to leverage its advancements in gaming for other applications.

Indeed, the company’s computing and networking services have seen considerable growth in recent years thanks to an increased appetite for artificial intelligence (AI) products. You see, Nvidia creates advanced chipsets called graphics processing units (GPU). GPUs are an important piece of hardware when it comes to Generative AI. Yet, in addition to its GPUs, Nvidia also offers software that piggybacks on top of these chipsets.

Essentially, companies using Nvidia’s GPUs end up relying on the company for the majority of their AI infrastructure, using both its hardware and software. This business model has been incredibly lucrative for Nvidia. Just check out the chart below to get a glimpse of the company’s growth.

NVDA turnover (quarterly) data by Y Charts

With such rapid revenue and profit growth, Nvidia’s momentum looks unbeatable. And it’s these trends that may suggest Nvidia stock is undervalued.

As the chart below shows, Nvidia stock is trading below its five-year average on both a price/earnings ratio (C/B) and price-free cash flow (P/FCF). On the surface, this dynamic seems very convoluted. Just think about how much Nvidia’s business has transformed over the past two years thanks to AI. How can the stock be cheaper today than five years ago?

NVDA Price/Earnings Ratio data by Y Charts

The literal explanation is that Nvidia’s earnings growth is growing at a faster rate than the stock price. So even though the company’s stock price seems to be moving into high gear every other day, net income and cash flow are accelerating even faster.

While looking at Nvidia stock from this perspective may suggest that the shares are undervalued, I’ll detail why I view the discussion around valuation to be a bit more nuanced.

Why don’t I totally agree with this idea?

During Son’s interview, he explained that Nvidia is undervalued because the total addressable market (TAM) for generative AI is expected to grow. Translation: GPU demand is expected to remain robust over the next few years, a tailwind that bodes well for Nvidia.

Although I agree with Son’s idea of ​​a TAM extension for AI infrastructureI wonder how much of a catalyst this will be for Nvidia.

Large technology companies such as Microsoft, Metaplatforms, AmazonAnd Alphabet are all developing their own custom chip architecture to train future AI models. Considering that each of these companies is considered to be Nvidia’s biggest customersI see the introduction of new GPUs to the market as a major obstacle.

To be frank, I don’t think any of these customers will completely sever ties with Nvidia. Rather, as more and more chips enter the landscape, I think the most direct way for Nvidia to compete is to reduce prices. If that were the case, Nvidia’s revenue would likely normalize while its margin profile would begin to tighten. The combination of a deceleration in revenue and a deterioration in margins will subsequently have adverse consequences on Nvidia’s profitability.

Generally speaking, when a company’s sales and profits start to decline, its valuation also declines.

Image source: Getty Images.

Is Nvidia a good stock to buy right now?

At first glance, Nvidia’s valuation multiples might suggest that the stock is currently trading at a reasonable price. However, given the growing threat of competition, I actually think Nvidia stock is trading at a premium relative to many other opportunities in the AI ​​space. And even if this premium is well deserved (for now), I wonder how much longer the stock will be able to maintain its current price.

Only time will tell if Son’s strategy against Nvidia holds up. As I expressed in a previous article, I think Nvidia is currently more of a trade than an investment. In other words, I don’t necessarily view the stock as a buy and hold. In my opinion, time your purchases and sales with Nvidia is going to be quite significant over the next few years. These ideas don’t exactly justify an undervalued stock, and for these reasons I think Son may disagree with this one.