Nvidia is growing so quickly its stock looks quite affordable based on one widely-used valuation metric, as long as investors maintain a long-term outlook.
Despite a recent dip, Nvidia (NVDA -0.21%) stock has been on a tear with a gain of more than 600% since the start of 2023. Its market capitalization soared from $360 billion to $2.5 trillion over that period, the fastest pace of value creation in stock market history.
But is it justified? Some analysts on Wall Street think Nvidia stock is overvalued, and they might be right in the short term based on its price-to-earnings (P/E) ratio. The P/E ratio is calculated by dividing a company’s share price by its earnings per share (EPS), and it’s one of the most widely-used valuation metrics among investors.
The Nasdaq-100 index, which includes Nvidia and all of its big-tech peers, trades at a P/E ratio of 30.7. Nvidia stock trades at a P/E ratio of around 58 based on its trailing-12-month EPS of $1.80, making it nearly twice as expensive as the index.
Based on those numbers alone, Nvidia stock is unquestionably expensive. However, the company is growing so quickly the situation completely changes if you look just one year into the future. Wall Street estimates Nvidia will generate $3.74 in EPS in its fiscal 2026 (which will begin Jan. 30, 2025), which means its stock is even cheaper than the Nasdaq-100 on a forward-looking basis:
Data by YCharts.
Nvidia’s data center chips are critical to the development of artificial intelligence (AI), and while competition is gradually emerging, the company has built a significant technological lead. Its data center revenue surged 427% in the most recent quarter, and demand isn’t forecast to slow anytime soon.
So, for investors with a time horizon of at least several years, Nvidia stock might actually be a bargain right now.
