Despite Revenue Skyrocketing More Than 100%, Nvidia Stock Trades at 24 Times Forward Earnings. Is the Market Warning Investors About What's to Come?

Nvidia (NASDAQ: NVDA) recently announced results that crushed Wall Street estimates. Its sales surged 106% year over year to $96.2 billion. Diluted earnings per share were up by an even better 128%.

It looks like the leading artificial intelligence (AI) business can do no wrong. Momentum continues to be on its side. Nvidia has possibly been the biggest winner in the ongoing AI infrastructure build-out.

And it shows, as shares have jumped 920% in five years (as of Sept. 3). This company has established itself as the world's most valuable enterprise.

But what's surprising to learn is that the AI stock isn't expensive. It trades at a forward price-to-earnings (P/E) ratio of 24.2. Based strictly on the jaw-dropping financial results this business keeps reporting, it's easy to argue that shares should command double the current valuation multiple.

Is the market warning investors about what's to come?

Image source: The Motley Fool.

AI to the moon

By any metric, AI usage is showing no sign of slowing. The number of tokens processed by Alphabet model APIs, for example, totaled 22 billion per minute last quarter. This was up from 16 billion three months before.

OpenAI and Anthropic, the two prominent AI labs that are planning for trillion-dollar initial public offerings in the near future, are posting skyrocketing revenue figures. And they have rapidly expanding user bases.

Amazon Web Services, Microsoft Azure, and Google Cloud are major hyperscalers that continue to reveal gargantuan customer order amounts with each passing quarter. As of June 30, they had a combined $1.7 trillion in cloud backlogs.

Consequently, the spending isn't letting up. Colette Kress, Nvidia's chief financial officer, estimates that hyperscaler capital expenditures (capex) will come in at $1.3 trillion in 2027. And before the end of the decade, management believes annual AI infrastructure spending will be between $3 trillion and $4 trillion.

All of this demand directly flows to the impressive financial metrics coming from Nvidia. It sells the powerful data center graphics processing units (GPUs) that support AI model training and inference.

On the recent Q2 2027 earnings call, Kress noted that the company expects 70% revenue growth in fiscal 2028. Assuming consensus estimates hold up and Nvidia's margin profile doesn't change, this outlook implies that the business will report a whopping $461 billion in operating income next fiscal year. This would be well ahead of anyone else.

Durability of demand is the trillion-dollar question

All of this information should make every investor extremely bullish about Nvidia's prospects. However, the market is concerned about the durability of Nvidia's growth. The forward P/E ratio of 24.2 demonstrates this.

No matter how smart the experts might sound, no one has any idea how long the AI boom will last. While the robust demand trends and ballooning capex numbers are optimistic data points, things could change quickly.

Maybe the enterprises that are driving usage don't realize the tangible benefits they were hoping for, prompting these customers to cut their AI-related budgets. There's a material probability that meaningful returns come later than the bulls hope, creating a timing gap (and potential bubble bursting) that calls into question how long the sizable capex can continue.

That would have a ripple effect up the value chain. If there's any evidence that AI spending is going to slow, sell-side analysts will be forced to lower their profit estimates for Nvidia. And the share price could drop.

Watching Nvidia's meteoric rise has been very exciting. AI can truly be a game-changing technology.

However, this is uncharted territory. And Nvidia's success rides on the music not stopping, not to mention its ability to fend off rivals developing more advanced chips.

Just like the industry is starved for Nvidia GPUs, the market has an unquenchable thirst for certainty. This is exactly why the company's quarterly results are so closely watched to ensure the growth story is alive. Trillions of dollars are on the line.

Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.