Nvidia's Forward P/E Has Actually Fallen as Its Stock Price Rose. Here's How That's Possible.

Nvidia (NASDAQ: NVDA) is up by 12% year to date, and yet it has gotten a lot cheaper. If a company's earnings growth outpaces its recent stock gains, that stock presents a more compelling valuation for new investors.

It doesn't mean long-term investors got robbed. Nvidia has still outperformed the S&P 500 so far this year. However, the reduced valuation suggests Nvidia can rally even higher, especially if it releases solid earnings near the end of August.

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How the forward P/E ratio is calculated

The forward P/E ratio doesn't just look at a stock's current price and earnings. This metric estimates how much a company's earnings will grow in the upcoming year, indicating what the P/E ratio would look like if the stock's price stayed flat.

For instance, a company with a $1,000 stock price and a $40 EPS has a P/E ratio of 25. However, if this same company is expected to grow its EPS by 25% next year, it would wind up with a $50 EPS. This forecast hasn't happened yet, so it won't show up in the current P/E ratio.

However, the forward P/E ratio includes this projected growth rate, resulting in an anticipated $50 EPS. Then, the forward P/E ratio becomes 20 in this example.

If this hypothetical stock delivered gains below 25% over the past year, then its forward P/E ratio would have dropped even if the stock price went up.

How this applies to Nvidia

Even though the stock is up by roughly 12% this year, the company's forward P/E ratio has dropped to 23.2. This same metric was closer to 40 at the end of July 2025.

The simple answer is that Nvidia's net income growth rate has outpaced its stock gains. Net income more than tripled year over year in Nvidia's fiscal 2027 first quarter. When such a large gap exists between earnings growth and stock gains, a company's forward P/E ratio can drop considerably.

Nvidia's guidance suggests that these types of growth rates will continue. A projected $91 billion in fiscal 2027 second-quarter revenue implies more than 10% sequential sales growth. Higher sales growth translates into an elevated EPS projection, which produces a lower forward P/E ratio.

Investors shouldn't just look at metrics like revenue, profits, and forward P/E ratios when assessing stocks. However, combining Nvidia's vast competitive moat in the critical AI chip industry with those metrics makes the stock look compelling.

Marc Guberti has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.