Nvidia Stock Is Down 12% From Its High. Here's What History Says Happens Next.

Nvidia (NASDAQ: NVDA) has had a rough few weeks. While it notched a new all-time high at the start of October, the stock has sold off and is now down over 10% from that level. That's a notable sell-off, especially given that it's the world's largest company by market cap.

But is it the perfect buying opportunity right now? Let's take a look at what history says to find out.

Image source: Getty Images.

Sizable drops are nothing new for Nvidia

Nvidia may have been available to invest in for nearly three decades, but its current business state has only been relevant since 2023, when the AI arms race began. If you look at a stock chart that uses the starting price of 2023 as the high point for Nvidia and then look at drops after that, you can see that selling off 10% or more is nothing new.

NVDA data by YCharts

In fact, it appears that Nvidia spends about as much time 10% or more off its all-time high as it does near its all-time high. So, this is familiar territory for Nvidia investors. The question is, is it a buy now?

I think the best way to assess this is to look at Nvidia's valuation. The best way to assess Nvidia's stock is the forward price-to-earnings (P/E) ratio, which uses analyst estimates to determine what its earnings over this fiscal year will be. From this perspective, Nvidia is extremely cheap, but there's one glaring thing that hasn't happened yet.

NVDA PE Ratio (Forward) data by YCharts

Normally, Nvidia's stock rallies to a 40-times forward earnings level by year-end. It hasn't done that this year, and if it did, that would roughly result in the stock doubling.

I doubt that happens, but the market is essentially not pricing in any 2027 growth, which is a huge oversight. Nvidia has already announced to investors that it expects to deliver nearly 90% year-over-year revenue growth for the upcoming quarter. This is far greater than many big tech stocks and will likely lead to a strong stock performance next year. None of this seems to be priced in because Nvidia trades at such a low forward P/E ratio.

To put its 22.7 times forward earnings price tag in perspective, the S&P 500 (SNPINDEX: ^GSPC) trades for 19.2 times forward earnings. That means Nvidia is barely getting a premium over the broader market despite telling investors it will nearly double revenue in the next quarter. That's a huge arbitrage opportunity, and investors should use this sell-off to scoop up shares.

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