Despite a recent decline, Nvidia (NASDAQ: NVDA) The stock price has risen by more than 600% since the start of 2023. The market capitalization has increased from $360 billion to $2.5 trillion during that period, the fastest pace of value creation in stock market history.
But is it fair? Some Wall Street analysts think Nvidia shares are overvalued , and in the short term, they may be right, given the company’s price-to-earnings (P/E) ratio. The P/E ratio is calculated by dividing a company’s stock 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 major tech peers, is trading at a price-to-earnings ratio of 30.7. Nvidia shares are trading at a price-to-earnings ratio of about 58 based on trailing 12-month EPS of $1.80, making it nearly twice as expensive as the index.
On those numbers alone, Nvidia stock is undeniably expensive. But the company is growing so fast that the picture changes completely if you look ahead just one year. Wall Street estimates that Nvidia will generate $3.74 in EPS in fiscal 2026 (which begins January 30, 2025), meaning that on a forward-looking basis, the stock is actually cheaper than the Nasdaq-100:
Nvidia’s data center chips are key to the development of artificial intelligence (AI), and while competition is gradually emerging, the company has built a significant technological lead. Data center revenue increased 427% in the most recent quarter, and demand is not expected to slow down anytime soon.
For investors with an investment horizon of at least several years, Nvidia shares could therefore be a bargain at the moment.
Should You Invest $1,000 in Nvidia Now?
Before you buy Nvidia stock, here are some things to consider:
The Motley Fool Stock Advisor team of analysts has just identified what they think is the 10 best stocks for investors to buy now… and Nvidia wasn’t one of them. The 10 stocks that made the cut could deliver monster returns in the years to come.
Think about when Nvidia made this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $643,212!*
Stock Advisor offers investors an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks each month. The Stock Advisor has service more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns as of August 6, 2024
Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
Think Nvidia Stock Is Expensive? This Chart Might Change Your Mind was originally published by The Motley Fool
