Why I'm Still Holding Nvidia (NVDA) Stock Despite Its Sky-High P/E Ratio

If you don't already own shares of semiconductor giant Nvidia (NASDAQ: NVDA), you probably wish you did. The stock has averaged annual gains of 63% over the past decade and would have turned a single $10,000 investment 15 years ago into $7.5 million (with dividends reinvested) or $6.9 million (without the reinvestment of dividends).

Is it too late to buy the stock now? I don't think it is. I've been a shareholder for only a year or two, and I'm planning to hang on -- despite the stock's having a steep price-to-sales ratio of 17 (as of Aug. 26).

Image source: The Motley Fool.

Meet Nvidia

Once known for its gaming chips, Nvidia has pivoted in a highly profitable way, now focusing on chips for data centers used in artificial intelligence (AI). Indeed, it boasts the dominant AI ecosystem.

It's also helping smaller companies afford AI infrastructure via a new financing platform. And it's broadening the scope of its offerings, such as by adding custom AI processors and partnering with an optical interconnect technology provider.

Nvidia is growing very rapidly -- with plenty of room to grow more

Stocks with lofty valuations can be worrisome but much less so if they're growing briskly. And with Nvidia, "briskly" isn't a strong enough word. The company recently reported a boffo second quarter, with revenue up 106% year over year (that's more than a doubling!) to $96 billion, and revenue from data centers up 117% to $89 billion.

Those numbers reflect the major role data centers play in the business, generating about 93% of total revenue. Another thing to appreciate is that this is a huge business, recently sporting a market capitalization of $5.5 trillion -- and it was still able to more than double its revenue. Also announced recently is a $12.9 billion acquisition of AI specialist Hugging Face.

Anyone worrying that AI has grown too much too fast can be reassured by Nvidia CEO Jensen Huang, who asserted that AI has "reached its inflection point," adding:

It's doing useful work. Its tokens are productive and profitable. Now, compute is revenue... And demand is accelerating. This time last year, one lab alone was driving the build-out; today, we have a golden age of new AI labs and start-ups, multiple frontier labs scaling in parallel, a thriving open-model ecosystem, and physical AI coming online -- with strong momentum across the U.S. and around the world.

The valuation is attractive

I'm likely to hang on to my Nvidia shares simply because its future looks quite rosy. And I think others buying now are likely to prosper over the long run, too -- because Nvidia shares, despite their breakneck growth, still don't seem overvalued. Yes, the price-to-sales ratio of 17 is on the steep side, but that's not so unusual for a really fast-growing technology company.

Meanwhile, the recent forward-looking price-to-earnings (P/E) ratio of 24 is well below the five-year average of 35, and the price-to-cash flow ratio, recently 29, is well below the five-year average of 51.

On top of that, Nvidia is buying back some of its own stock -- it bought $26 billion worth of its own stock in the last quarter. A responsible management will do so only when it sees its shares as undervalued.

Want more? Nvidia recently increased its dividend payout by a factor of 25 so that it now sports a dividend yield of 0.49% (as of Aug. 27). Take a closer look at Nvidia and see what you think. It's not without risks, but to me, even if there's a market downturn and it drops sharply, I would expect it to eventually recover and set new highs.

Selena Maranjian has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.