SoftBank CEO Masayoshi Son believes Nvidia is undervalued. That’s why I disagree.

Masayoshi Son is one of the most famous investors in modern history. As CEO Japanese holding company SoftBankSon has extensive experience developing thoughtful investments across many different industry sectors.

Sure, there have been some failures 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 business Arm Holdings as an example. Back in 2016, Softbank acquired Arm for approximately $32 billion. Today, Arm is a publicly traded company and boasts a market capitalization of nearly $150 billion. That’s a pretty solid return on investment.

Speaking of semiconductors, Son recently made a startling observation about the world’s most valuable chip business: Nvidia (NVDA 1.55%). During a recent interview with CNN’s Richard Quest, Son floated the idea that Nvidia is undervalued.

How can a stock that’s up 880% in two years be considered undervalued? Below I’m going to look at why Nvidia stock may look undervalued, but I’ll explain why I don’t entirely agree with Son’s call.

Why Nvidia looks undervalued

For years, Nvidia’s focus has been on the gaming industry, specifically improving the visuals and graphics on computer screens for gamers. However, over the past couple of years, Nvidia has found ways to apply its gaming advancements to other applications.

Namely, the company’s computing and networking services have seen tremendous growth in recent years, driven by increased demand for artificial intelligence (AI) products. You see, Nvidia creates cutting-edge chipsets called GPUs (graphics processors). GPUs are an important piece of hardware as it relates to generative AI. However, in addition to its GPUs, Nvidia also produces software that runs on top of these chipsets.

Essentially, businesses using Nvidia GPUs end up relying on the company for much of their artificial intelligence foundation, using both its hardware and software. This business model has proven incredibly profitable for Nvidia. Just look at the chart below to get an idea of ​​the company’s growth.

NVDA Revenue (quarterly) data on YCharts

With revenues and profits growing at such a rapid pace, Nvidia’s momentum looks unstoppable. And it is these trends that may indicate that Nvidia shares are undervalued.

As shown in the chart below, Nvidia shares are trading below their five-year average at both price-earnings ratio (P/E) and cash flow from price to free (P/FCF). At first glance, this dynamic seems quite confusing. Just think how much Nvidia’s business has changed over the past couple of years thanks to artificial intelligence. How can stocks be cheaper today than they were five years ago?

NVDA PE ratio data on YCharts

The literal explanation is that Nvidia’s earnings growth is growing at a faster rate than its share price. So while the company’s stock price seems to change daily, net income and cash flow are actually accelerating even faster.

While looking at Nvidia stock through this lens may make it seem like the stock is undervalued, I’m going to detail why I think the debate around valuation is a little more nuanced.

Why don’t I fully support this idea?

During Son’s interview, he explained that Nvidia is undervalued as the total addressable market (TAM) for generative AI is expected to become larger. Translation: Demand for GPUs should remain strong over the next few years, and that bodes well for Nvidia.

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

Large technology companies such as Microsoft, Meta platforms, AmazonAnd Alphabet they are all developing their own chip architectures to train future AI models. Considering that each of these companies is considered NVIDIA’s largest clientsI see new GPUs coming to market as a major hurdle.

Frankly, I don’t think any of these customers will cut ties with Nvidia completely. Rather, as more chips hit the market, I think the most direct way to compete with Nvidia is by lowering prices. If that’s the case, Nvidia’s earnings will likely normalize and its profitability profile will begin to tighten. The combination of lower revenues and lower margins will subsequently impact Nvidia’s profitability.

Generally speaking, when a company’s sales and profits begin to decline, so does its valuation.

Should you buy Nvidia stock right now?

At first glance, Nvidia’s valuation ratios may indicate that the stock is currently trading at a reasonable price. However, given the growing threat of competition, I believe Nvidia shares are trading at a premium compared to many other AI opportunities. While the premium is well deserved (for now), I doubt how long the stock can sustain its current growth.

Only time will tell if Son’s vision for Nvidia will pan out. As I said in a previous article, I think Nvidia is more of a deal than an investment right now. In other words, I don’t necessarily view the stock as a buy-and-hold. To me, time your buys and sells with Nvidia will be very important over the next few years. These ideas don’t exactly make the case for stocks being undervalued, and for these reasons, I think Son might disagree.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former chief market development officer and spokeswoman for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, chief executive of Alphabet, is a member of The Motley Fool’s board of directors. Adam Spatacco has positions in Alphabet, Amazon, Meta Platforms, Microsoft and Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms, Microsoft and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 Microsoft calls and short January 2026 $405 Microsoft calls. The Motley Fool has disclosure policy.