This year, Nvidia Corp. (NVDA Quick QuoteNVDA - Free Report) has seen a rally that has catapulted its market value by approximately $400 billion. Its shares are up 109% this year versus the Nasdaq’s 32% gains. A lion's share of this gain is attributable to the current stock market hype around artificial intelligence (AI), with Nvidia's chips acting as the key tailwind, as quoted on a Bloomberg article.

If this was not enough, shares rose further 24.6% after hours on May 24 after Nvidia reported estimate-beating Q1 earnings results as well as guidance. The post-earnings rally increased Nvidia’s stock market value by about $200 billion to over $950 billion, making Nvidia as Wall Street's fifth-most valuable company.

It is now time to determine if the super-rally will persist or if the bubble is set to burst. After all, “we learned from 2000-2003, companies that are going to change the world still have valuation limits," said Miller Tabak’s Maley, as quoted on Bloomberg.

Let’s delve a little deeper.

The Stake in Nvidia's Surge

Investors, lured by the successes of AI ventures such as OpenAI’s ChatGPT, are seeking exposure to this rapidly growing sector, with Nvidia's semiconductors being a popular choice. The firm's stock has outperformed all others in both the S&P 500 and Nasdaq 100 indexes (before the Q1 earnings release), despite then-challenging conditions in its core personal computing and data center markets.

Estimate-Beating Q1 Results

Quarterly earnings of $1.09 per share, beating the Zacks Consensus Estimate of $0.92 per share. Revenues of $7.19 billion breezed past the Zacks Consensus Estimate by 10.50%. The chipmaker forecast strong estimate-beating revenue growth and said it was boosting output of its AI chips to meet burgeoning demand.

Q1 Data Center Revenue Shows Promise

Nvidia's data center business, a leading provider of AI accelerator chips, has been rebounding. The data center revenue for Nvidia was $4.28 billion in Q1, up 14% year over year (way higher than the market expectation of a 4% rise) and up 18% sequentially.

Upbeat Guidance Proving the AI Impact

With such monumental share price rise, the challenge was to demonstrate that this AI-induced demand is producing enough revenue to validate the stock's gains. The company won here also and expects revenues of $11 billion in Q2, plus or minus 2%, compared with the analysts' estimate of $7.2 billion. That would equate to the highest quarterly total revenue for the company.

What Does the Current Valuation Say?

Nvidia is overvalued in every respect. Going by valuation metrics, the Price-to-Sales ratio of NVDA is 28X versus the industry average of 7.6X. The price-to-book ratio of NVDA is 34.1X versus 5.2X. The P/E (ttm) of NVDA is 122.6X versus the industry-average of 29.7X. The forward P/E of NVDA is 60X versus the industry score of 34.8X. NVDA is heading toward its peak of 68 times expected earnings in 2021, according to Refinitiv data, as quoted on Reuters. If we just focus on AI, the Computers - IT Services industry valuation is even cheaper at around 20.40X.

A Further 10% Rally Possible?

Considering NVDA’s peak P/E touched in 2021 as the limit (per the Refinitiv data), a further 13% rally is possible. It is a momentum stock. The stock has a Zacks Rank #3 (Hold).

Are Nvidia-Heavy ETFs Better Bets?

Investors intending to ride NVDA’s AI-growth story but still wary of the high valuation may take the ETF route. This is because ETFs helps investors to mitigate one stock’s average performance with the other stocks’ stellar performances.

Below we highlight a few ETFs with heavy exposure to Nvidia for investors seeking to bet on the stock with much lower risk.

VanEck Semiconductor ETF (SMH Quick QuoteSMH - Free Report) – about 15% Exposure to NVDA

AXS Esoterica NextG Economy ETF (WUGI Quick QuoteWUGI - Free Report) – about 14% focus on NVDA

Simplify Volt RoboCar Disruption and Tech ETF (VCAR Quick QuoteVCAR - Free Report) – about 10% focus on NVDA