Is There Too Much Hype Baked Into Nvidia's Stock?

Nvidia (NASDAQ: NVDA) is the largest company in the world, with a market cap hovering around $5 trillion. The next largest is Alphabet, sitting at $4.1 trillion. That's a sizable lead on its nearest megacap peer, and many have said that Nvidia has become overvalued due to the hyped and Wall Street fervor surrounding artificial intelligence (AI).

But investors shouldn't take those words at face value. Instead, they should dive deeper and look at the numbers.

Image source: The Motley Fool.

Nvidia isn't all that expensive

First, let's start with the most traditional valuation metric for stocks: the price-to-earnings (P/E) ratio. This is the most commonly cited value metric, even though it has its flaws. (They all do.) Nvidia trades today at 42 times earnings -- not cheap at all.

NVDA PE Ratio data by YCharts.

But this is a trailing metric, so it doesn't account for Nvidia's massive growth expectations. Furthermore, there are several companies that have valuations similar to Nvidia without that expected growth. Apple, for example, trades at 34 times earnings, and Costco Wholesale trades at 53.

Next, let's look at the forward price-to-earnings ratio. This is a less precise science, as the metric uses analysts' projections to estimate what the company's earnings will be over the next fiscal year. Nvidia's forward P/E is 25. That means Wall Street analysts expect Nvidia's earnings to nearly double this year, which also jibes with what the company has guided for in the near term. The reality is that the AI infrastructure build-out is far from over, and all of the massive data center projects announced last year will take a few years to get up and running, which will stretch Nvidia's growth timeline for at least several years beyond 2026.

Wall Street analysts estimate Nvidia's revenue growth will be 31% next year. That's a far cry from this year's projected 72% growth, but it's still way faster than the market's average growth rate of 10% annually. So, does Nvidia's stock have too much hype baked into it? I don't think so.

The reality is that the AI trend's growth will last for several more years, and Nvidia is well positioned to benefit from it. With the S&P 500 trading at 21.8 times forward earnings right now, Nvidia actually isn't priced at that great a premium relative to the broader market. So, I think Nvidia is still a safe stock to invest in, even if it has run up a fair bit over the past month.

Keithen Drury has positions in Alphabet and Nvidia. The Motley Fool has positions in and recommends Alphabet, Apple, and Nvidia. The Motley Fool has a disclosure policy.