Has Nvidia Become a Value Stock?

Nvidia (NASDAQ: NVDA) has become one of the key winners of this artificial intelligence (AI) revolution -- this is thanks to the company's early entry into the market with the fastest chips around and its focus on innovation. Nvidia makes graphics processing units (GPUs), the chips that power essential AI tasks like the training and inference of models. All of this has led to enormous levels of earnings growth for the company and a stock price that's soared more than 300% over three years.

Considering Nvidia's leading position in this high-growth market, you may expect it to be one of the most expensive AI stocks out there -- even after recent declines in the sector. But the company is actually among the cheapest. Has Nvidia become a value stock? Let's find out.

Image source: Nvidia.

Nvidia's 30-year story

First, let's catch up on the Nvidia story so far. This tech giant has been around for more than 30 years, and in its earlier days, it primarily served the video game industry with its powerful GPUs. But Nvidia later broadened the use of these chips and, in more recent years, recognized their potential in the field of AI. The company made this technology the focus, and it's clearly won that bet.

Nvidia's revenue and profit have soared in the double- and triple-digits, reaching record levels. In the latest quarter, the chip giant reported sales of more than $81 billion and net income of $58 billion. And Nvidia has maintained a gross margin of more than 70% quarter after quarter.

The company hasn't just sold chips, though, and instead has built out its presence to include complete systems and related products and services. And Nvidia has even developed platforms for specific industries, such as healthcare and automotive, so that they can easily apply AI to their needs. So Nvidia isn't just a chip designer but instead the creator of an AI empire.

Nvidia's valuation vs peers

Considering all of this, even during the recent AI stock pullback, you might expect Nvidia to remain pricier than its peers. But this isn't the case. Here's a look at Nvidia's price in relation to forward earnings estimates, along with the valuations of two major peers, Advanced Micro Devices and Broadcom.

NVDA PE Ratio (Forward) data by YCharts

As we can see, Nvidia trades at a significant discount. A look at Nvidia's valuation in relation to its fellow "Magnificent Seven" players paints a similar picture. Nvidia is among the cheapest.

NVDA PE Ratio (Forward) data by YCharts

At these levels, could Nvidia even be considered a value stock? As of January of this year, value stocks and growth stocks had forward price-to-earnings ratios of more than 17 and 29, respectively, according to Siblis Research. This is based on the Russell 1000 growth and value indexes. Nvidia, at 23, finds itself between the two.

In such a situation, Nvidia could appeal to both growth and value investors. The company has a long-established track record of growth and a solid competitive position, and considering this, it looks undervalued. This makes it a nice fit for the value investing style. Nvidia's dominance in AI and the idea that the AI boom may still be in its early stages suggest that significant growth opportunities lie ahead -- and from today's price level, Nvidia stock could skyrocket on future good news. This makes the stock a good choice for growth investors.

Only very cautious investors may hesitate to buy Nvidia stock as the tech industry does involve risk -- and in recent times, worries about massive AI spending levels have weighed on these players. If this continues, AI stocks could traverse a difficult period. And even though long-term prospects remain bright, Nvidia and peers may not be the best choices for cautious investors.

For most other investors, though, Nvidia today offers value and growth, making it an excellent stock to buy and hold as the AI story continues to develop over the long haul.

Adria Cimino has positions in Amazon and Tesla. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Broadcom, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool has a disclosure policy.