If one had earned a profit every time someone claimed that Nvidia (NVDA) stock was “overvalued” over the past three years, it would have amounted to a considerable fortune. Since the launch of ChatGPT at the end of 2022, the share price of this leading AI chip company has risen significantly, accumulating a 1,350% gain over the three years ending October 28. This phenomenon has sparked a wave of tech companies racing to develop generative AI capabilities. It is important to clarify that a significant stock price increase does not inherently equate to overvaluation. While a correction in its stock price due to factors such as technological substitution cannot be ruled out, an analysis based on existing data makes it difficult to support the “overvaluation” argument.
There is no single “correct” method for stock valuation analysis. When people judge the valuation of a stock, it is always a matter of opinion rather than fact. Although certain valuation metrics may be more useful in specific contexts, choosing inappropriate metrics can be misleading.
Take the price-to-sales (P/S) ratio, for example. This metric has obvious flaws when applied to Nvidia. As one of the least practical valuation metrics, the P/S ratio ignores a company’s critical ability to convert sales into profits and cash flow. In fact, Nvidia excels in this regard, and using the P/S ratio for valuation would unfairly disadvantage it.
Another common argument focuses on the price-to-earnings (P/E) ratio. Some believe that Nvidia’s P/E ratio is higher than that of its peers, making it overvalued. The flaw in this comparison lies in ignoring differences in earnings growth. Just as it is absurd to judge whether a person is overweight based solely on weight without considering height, valuation analysis must incorporate growth. For a company with an annual earnings growth rate of 40%, the market naturally is willing to grant a higher valuation premium compared to a company with a 10% growth rate.
A more scientific approach is to consider the P/E ratio in conjunction with earnings growth. Variants of the price-to-earnings growth (PEG) ratio are more informative than the P/E ratio alone. As a rule of thumb, a PEG ratio of 1.0 typically indicates reasonable valuation, but this value can rise significantly during strong bull markets or when growth expectations are high.
Specific data shows that Nvidia’s P/E ratio was 66.0 in the same period last year, with a PEG ratio of just 0.16, while Microsoft’s corresponding figures were 35.2 and 2.0. If one were to conclude that “Microsoft is a better investment” based solely on the P/E ratio difference, it would clearly overlook the growth disparity. Evidence shows that investors who favored the PEG metric were more likely to favor Nvidia, a judgment validated by market performance—over the past year, Nvidia’s stock price rose 43.1%, outperforming Microsoft’s 28% gain. Currently, Nvidia’s PEG ratio stands at 0.881, still indicating that its valuation is within a reasonable range.
As a core player in AI infrastructure development, Nvidia holds 70% to 95% of the market share. It continues to strengthen its competitive advantage by launching vertically integrated hardware and software solutions, such as the CUDA software platform and the DGX Spark supercomputer. Although the percentage growth rate naturally declines as the company scales, sales in the third quarter of fiscal 2025 still achieved a 56% year-over-year increase, with the data center business growing 73% as the main driver. As sales in the Chinese market gradually recover, future growth momentum remains strong.
The approximately 1,500% stock price increase over the past five years reflects market recognition of the potential of the AI revolution. Although competition is intensifying and uncertainties exist, Nvidia plays a key role in the technological transformation reshaping all aspects of daily life. To achieve a market capitalization exceeding $10 trillion by 2030, a 104% stock price increase is required. Given its central position in the AI field and its continuous innovation capabilities, this goal, while challenging, is achievable.
