Is It Too Late to Buy Nvidia Stock?

Nvidia (NASDAQ:NVDA) trades around $224 as of this writing, within about 5% of its 52-week high of $236.54 and up about 37% from its 52-week low. The company is worth more than $5.4 trillion.

And anyone who has watched the artificial intelligence (AI) chip giant's stock climb for the past few years without buying it has probably wondered some version of the same thing: Is it too late?

The chart can't answer that. The company's latest results and guidance can, though, because they show what today's price assumes about the next three years of earnings. Let's take a look.

Image source: The Motley Fool.

Accelerating growth

Underscoring how strong demand remains, Nvidia's revenue rose 106% year over year to $96.2 billion in the fiscal second quarter of 2027, a period that ended July 26. It was the company's fourth quarter in a row of accelerating growth, with the rate stepping up from 62% to 73% to 85% over the three quarters before it. Data center revenue grew even faster, climbing 117% to $89 billion -- 93% of Nvidia's total revenue. And profits kept pace. Net income more than doubled year over year to about $60 billion, helped by a 75% gross margin.

The outlook is strong, too. Management guided for fiscal third-quarter revenue of $108 billion, about 12% more than the fiscal second quarter's total.

For perspective, that one quarter of guided revenue is more than the nearly $61 billion Nvidia generated in all of fiscal 2024.

What is today's price counting on?

Over the past four reported quarters, Nvidia earned $7.91 per share. At about $224, that comes to about 28 times earnings.

For a company growing this fast, though, that figure ages quickly. What matters more is where earnings go from here.

"We expect to grow revenue by approximately 70% in fiscal 2028. This is a supply constrained outlook," chief financial officer Colette Kress told analysts on the company's earnings call in late August.

In other words, what caps next fiscal year's growth is how many chips Nvidia can make, not how many its customers want.

Margins are the one piece of the outlook moving the other way. Memory prices have climbed more than the company anticipated, and management now expects gross margin to slip to 74% in the fiscal third quarter, bottom at 71% to 72% in the fiscal fourth quarter, and settle at 72% to 73% in fiscal 2028.

Even on those lower margins, 70% revenue growth should leave earnings per share somewhere close to double the trailing figure. Analysts' fiscal 2028 estimates sit in the same neighborhood. That prices shares at about 14.5 times what the company is forecast to earn in fiscal 2028, roughly half of what they cost on the past year's profits.

A price-to-earnings multiple of about 14.5 on a forecast one year out is what a mature, slow-growing business might command, not one management expects to grow 70%. I'd argue the market has already priced in the year of growth Nvidia's supply chain is lined up to deliver, while giving the company little credit for anything after that.

Nvidia doesn't need three great years

For a purchase at today's price to work out over the next three years, then, Nvidia doesn't need to keep doubling. It needs fiscal 2028 to land somewhere near the growth management says supply already supports.

And it needs to hold onto those earnings afterward, rather than giving them back in a downturn.

Holding on is the harder half. Not only does data center revenue account for 93% of the total, but much of that comes from a short list of enormous cloud companies whose spending plans can change.

Chips have been a cyclical business for decades, too, and Nvidia's own history includes some painful downturns. If AI spending stalls in fiscal 2029 or 2030, earnings could fall outright -- and take the stock down with them.

So, is it too late to buy Nvidia stock? I don't think so. Today's price, I think, already treats fiscal 2028 as the end of the big growth, and the business enters that year with demand still outrunning supply.

Of course, a severe downturn in AI spending can't be ruled out. But if fiscal 2028 lands anywhere close to the 70% management expects and earnings simply hold from there, buyers at this level should do fine.

Ultimately, I'd buy shares at today's price. If the next couple of quarterly reports show growth rolling over, or the fiscal 2028 outlook comes down, I'd revisit that.

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.