Nvidia Grew Revenue 71% and Still Costs 21 Times Forward Earnings. The Market Is Betting the Growth Stops.

Over the past 12 months, Nvidia (NASDAQ: NVDA) grew revenue 71% to $253 billion and more than doubled its net income, to about $160 billion. The stock, meanwhile, trades at about 21 times forward earnings (the profits the company is expected to produce over the next year) as of this writing.

That's the kind of price tag the market usually puts on a mature business with ordinary prospects -- not on the largest company in the stock market, worth about $5.1 trillion, while its revenue climbs 71% a year. A price like this says the market expects the extraordinary part of Nvidia's growth to end, and to end fairly soon.

I think that bet overshoots. Here's a closer look at why.

Image source: The Motley Fool.

Growth is moving the wrong way for the skeptics

In the quarter Nvidia reported a year ago, revenue grew 56% year over year. In the fiscal first quarter of 2027 (the period ended April 26), revenue grew 85% year over year to $81.6 billion. For perspective, that's more revenue in one quarter than Nvidia generated in its entire fiscal 2024. And management's guidance calls for revenue of about $91 billion in the fiscal second quarter, nearly double the $46.7 billion the company generated in the same period a year earlier.

Guidance is a forecast, not a result, and forecasts can miss. But it's management's most concrete signal about demand, and it points up.

In other words, growth isn't decelerating toward that mature-company price tag. It has been accelerating away from it.

The engine of all this is the data center business, which supplies the chips and networking gear behind artificial intelligence (AI) computing. Its revenue rose 92% year over year to $75.2 billion in the fiscal first quarter.

Profitability kept pace, too. Nvidia's gross margin came in near 75%, and non-GAAP (adjusted) earnings per share rose 140% year over year to $1.87.

Alongside the results, Nvidia raised its quarterly dividend from a penny per share to $0.25 and announced an $80 billion buyback authorization. That's a small dividend, but it says a lot about how much cash the business now generates.

"The buildout of AI factories -- the largest infrastructure expansion in human history -- is accelerating at extraordinary speed," CEO Jensen Huang said in the company's fiscal first-quarter earnings release.

Management's tone could prove too optimistic, of course. But the numbers, so far, keep agreeing with it.

Priced as if the surge is already over

Now look at the price. Shares trade around $210 as of this writing, below the $236.54 they reached within the past year, even as the results kept strengthening. At about 21 times forward earnings, the market expects Nvidia to earn about $10 per share over the next year -- up more than 50% from the $6.53 it earned over the trailing 12 months. So even the skeptical price concedes next year.

The skepticism is aimed at everything after that. When the market pays 21 times forward earnings for an average large company, it's paying for modest, dependable growth. Applied to Nvidia, the same price treats the years beyond the next one as ordinary, as if growth flattens out quickly once the current wave of AI spending passes.

Maybe it does. Semiconductors have always been cyclical, and some of Nvidia's biggest customers are designing chips of their own. If AI spending pauses, a stock valued on next year's earnings could still get hit hard.

Investors should take that possibility seriously. After all, it's the strongest argument for caution here, and it's probably the reason the shares don't command a premium price despite premium growth.

But there's a difference between growth slowing and growth stopping, and today's valuation sits closer to the second. Nvidia's own guidance implies the quarter it reports next nearly doubled year over year. And if growth a few years out lands anywhere near respectable (say, 20% or 30% instead of zero), then today's buyer paid an ordinary price for what could be an extraordinary stretch of compounding.

I think the market has the direction right and the timing wrong. Growth this fast will cool eventually -- it always does. But a price built for a company whose growth is cooling now doesn't match the evidence, which keeps pointing the other way. I like the stock here. I'd just keep the position sized for the swings that come with a cyclical business.

Daniel Sparks and his clients do not have positions in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.