Why Nvidia Stock is Worth Considering Right Now

Nvidia's (NVDA) earnings report for the fourth quarter of fiscal 2025, which concluded on January 26, 2025, significantly affected the market last week. It triggered a sell-off in major stock indexes on Thursday, but the market staged a recovery on Friday.

As of March 2, Nvidia's stock was down 7% for the year, lagging behind the S&P 500 index, which has seen a modest gain of 1.2%. After witnessing an astonishing rise of over 800% between 2023 and the end of 2024, it is not surprising that investors would expect some decline in this rapidly growing stock. However, there are multiple reasons to believe that Nvidia is currently undervalued, despite what its stock price suggests.

Nvidia's Valuation Decline

A common financial evaluation metric, the price-to-earnings (P/E) ratio, calculates a stock's price relative to its earnings per share (EPS). This ratio reveals how much investors are willing to pay for a company's earnings. Generally, a higher P/E ratio indicates a more expensive stock viewed on the basis of past earnings.

This metric is particularly beneficial for analyzing companies with stable business models and moderate growth rates, such as Apple, Microsoft, and Coca-Cola. However, the P/E ratio may not be as relevant for companies like Nvidia that are in the midst of rapid transformation or fluctuating profitability.

While Nvidia's stock price has climbed substantially, so have its earnings. As a result, despite the rising price, the valuation has actually become cheaper, especially over the last nine months where Nvidia's stock price remained mostly flat while earnings skyrocketed.

The current P/E ratio for Nvidia stands at 42.5, which might appear high compared to the S&P 500's P/E ratio of 29.8. Nonetheless, considering Nvidia's rapid earnings growth, its forward P/E ratio—a reflection based on analyst predictions for the upcoming year—is only 27.8. This suggests that if Nvidia's stock price remains constant for a year and it meets growth estimates, it would be valued similarly to the S&P 500.

Impressive Growth Rates

Nvidia's performance largely relies on its sales of graphics processing units (GPUs) to hyperscalers including Amazon, Microsoft, Alphabet, and Meta Platforms. This trend has led to significant growth in Nvidia's sales, operating income, and profit margins.

Over the past five years, Nvidia's revenue has nearly increased eight-fold, while operating income surged more than 18-fold, demonstrating its explosive growth. For instance, during fiscal 2025, Nvidia generated over 55 cents of profit for every dollar of revenue—a profit margin rarely seen for a company of its scale.

Pursuing Long-Term Potential

Despite potential cyclical downturns in the semiconductor industry or reduced spending from major clients, Nvidia possesses various opportunities for growth. The CEO of Nvidia, Jensen Huang, stated during the earnings call that future advances in AI would require even greater computational resources, potentially driving more demand for their products.

Investors in Nvidia are essentially betting on the ongoing adoption of AI across diverse markets and applications. Though its growth may naturally decelerate as the industry matures, analysts expect Nvidia's earnings per share (EPS) to reach $4.49 in fiscal 2026 and $5.72 in fiscal 2027, indicating continued robust growth rates.

Even projecting a slowdown to a 20% growth rate over the next decade, Nvidia could still achieve significant stock prices. For example, this outlook implies that Nvidia could be valued at around $300 per share in ten years if current trends continue. This scenario highlights how strong earnings growth can render a seemingly high-priced stock as an appealing investment.

The Rationale Behind Nvidia as a Long-Term Investment

Many investors tend to focus on short-term factors, such as quarterly earnings and economic conditions. Yet, Nvidia’s exceptional growth suggests that even with market fluctuations, it remains a potentially lucrative option in the long run. Additionally, if hyperscalers reduce their spending, Nvidia has untapped potential in markets such as robotics and automation.

Considering all aspects, the balance between risks and the potential upside makes Nvidia stock an opportunity not to be overlooked.

Nvidia, Valuation, Growth