Nvidia Stock Just Did Something for the First Time in 10 Years. Here's What History Says Happens Next.

After becoming the company that turned artificial intelligence (AI) from a research project into a generational spending boom, Nvidia (NASDAQ: NVDA) has delivered one of the greatest wealth-creation runs in recent market history.

This year, however, the company's earnings estimates have raced ahead of the share price. As a result, Nvidia's forward price-to-earnings (P/E) multiple has compressed to levels last seen about 10 years ago. While investors treat the $5.6 trillion behemoth like it is already fully priced, history suggests this is precisely when the next leg up starts to form.

Image source: Nvidia.

How Nvidia became the king of AI

It wasn't long ago that Nvidia was primarily known for making graphics cards that visually enhanced video games. In the background, however, CEO Jensen Huang and his team were quietly laying the foundation for something bigger: a software and hardware stack that lets researchers train massive models.

After ChatGPT was publicly released, hyperscalers such as Amazon, Microsoft, Alphabet, and Meta Platforms quickly realized they needed more compute. This put Nvidia in a first-mover position, as its GPUs were available as the default tool for generative AI development. The company complemented its hardware with CUDA, a software layer built around the chips, which helped create a moat that competitors are still struggling to penetrate.

Nvidia's data center revenue went from a side hustle to the core engine of the company. This underscores that customers are not just buying chips; they are building entire AI factories around Nvidia's architecture. This is how an ordinary semiconductor company evolved into the public face of the AI infrastructure build-out.

Breaking down Nvidia's valuation

As of Sept. 29, Nvidia stock has gained 24% this year. While this is a respectable return, it drastically lags that of its core rival, the much-smaller Advanced Micro Devices, which has rocketed 188% on the year.

Let's dive into why Nvidia's valuation profile is so attractive right now. The forward P/E ratio simply divides the current share price by the earnings Wall Street expects over the next 12 months. The table below includes Nvidia's consensus earnings estimates for the next four quarters:

Data source: Business Insider.

Given Nvidia stock hovers around $230 and analysts expect $12 in combined earnings over the next four quarters, the math implies a forward P/E of 19. Note that the multiple has expanded a bit over the last couple of days, as Nvidia stock rallied following the announcement of a record $150 billion share repurchase.

When profits rise faster than the stock price, valuation multiples fall even if the price goes up. This is exactly what is happening with Nvidia this year. The takeaway here is that this is the lowest forward earnings reading for Nvidia in a decade and well below the company's longer-term average near 32.

The multiple is compressing because investors are questioning how long the AI boom can last at this scale. Meanwhile, rising memory costs are squeezing near-term margins, and competition from custom silicon is getting louder. While these worries are fair, they are also the same kind of concerns that appeared the last few times Nvidia's valuation hit a floor.

Why Nvidia stock looks poised for a rally

Historically, when Nvidia's forward P/E multiple hovered around the mid to high teens, the stock did not stay that cheap for long. The floor has generally sat near the 17-to-20 range. The next stop is not necessarily a return to the 40 or 50 times peaks seen in earlier cycles of the AI revolution. Instead, I think a reasonable expansion would be toward 25 times. Based on the same estimate for $12 in earnings over the next 12 months, this would imply a share price around $300, or about 30% above today's level. A return toward the longer-term average of 32 times would imply something closer to $384, or a gain of roughly 67%.

This setup is why the current quiet stretch could be a compelling entry rather than a warning signal. With Nvidia, you are not buying a stock trading at unsustainable multiples based on a story. Rather, you are buying the dominant AI infrastructure company at a decade-low multiple while it is still guiding for explosive growth over the next year.

For investors thinking in terms of years instead of quarters, Nvidia is a straightforward buy-and-hold opportunity. The hardware and software moat, the customer lock-in, and the next product cycles are not disappearing just because the multiple took a breather. History says this is usually the time you want to pounce and own the stock.

Adam Spatacco has positions in Alphabet, Amazon, Microsoft, and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Meta Platforms, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.