Is Nvidia Stock Too Cheap to Ignore?
Key Points
Nvidia's P/E ratio is arguably low, particularly when considering the company's revenue growth.
Even if its growth slows, Nvidia is still highly likely to outperform the broad market.
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It may surprise some investors to see Nvidia (NASDAQ: NVDA) described as "too cheap to ignore." The artificial intelligence (AI) chip giant is up by around 1,800% from its bear market low in fall 2022, and as the world is in the midst of a massive AI infrastructure build-out, the stock may appear invincible.
Nonetheless, the state of Nvidia's stock probably still leaves investors with one pressing question: Does its "low" valuation mean they should buy the chip stock, or do the gains it has already made imply investors should prepare for slower stock price appreciation from here?
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Nvidia's valuation
Nvidia today trades at a price-to-earnings (P/E) ratio of 34 and a forward earnings multiple of 25. Considering that its revenue grew by 85% in the first quarter of its fiscal 2027 (which ended April 26), that valuation appears inexpensive by any measure. That suggests that there's little reason to anticipate much downside.
However, thanks to the aforementioned gains, the company's market cap now stands at $5.4 trillion. In a world where no stock has yet reached a $6 trillion market cap, growth investors may wonder whether Nvidia is still worth buying. Certainly another 1,800% gain appears unlikely in the near term.
Still, the company's situation appears to leave investors plenty of room to benefit. Given its massive expected revenue growth, profits are likely to continue rising, which will inevitably push the stock price higher. Such conditions make it likely that Nvidia will continue setting new market cap records.
Investors should also remember that Nvidia remains positioned to outperform the S&P 500's (SNPINDEX: ^GSPC) long-term average growth rate of about 10% and even the 29% average annualized returns of the VanEck Semiconductor ETF since its inception in 2011.
Hence, while Nvidia is unlikely to turn small investors into millionaires, its potential to deliver outsize returns remains intact.
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Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
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