NVIDIA (NVDA), the artificial intelligence chip giant, has underperformed in terms of stock price this year, with cumulative declines exceeding 11%. Despite the company delivering strong quarterly results and future guidance exceeding Wall Street’s consensus expectations, the market seems unimpressed.
During a company meeting earlier this year, NVIDIA CEO Jensen Huang projected that from this year through 2027, the company’s current Blackwell platform and the upcoming Vera Rubin platform would achieve $1 trillion in sales. However, this outlook also failed to move the market. In fact, NVIDIA’s forward price-to-earnings (P/E) ratio has recently dropped to a level comparable to that of the benchmark S&P 500, marking the first time in over a decade. NVIDIA is currently trading at just over 20 times forward earnings, while the company’s revenue has grown 73% year-over-year, and net profit has surged by an even more impressive 79%. For any company, especially a giant of NVIDIA’s scale, such growth is remarkable.
Overall, AI stocks have struggled recently, as investors have grown weary of the massive investments being made by hyperscalers to build AI infrastructure. The so-called “Magnificent Seven” companies are expected to spend nearly $700 billion in total capital expenditures this year, primarily on AI infrastructure such as data centers. While NVIDIA itself is not a major spender on capital expenditures, its business is highly dependent on this build-out process, as the company sells chips and platforms to enterprises for use in their data centers to train large language models and run AI solutions.
Bears worry that hyperscalers may struggle to generate good returns at such high levels of spending, and that funding could eventually dry up. Investors are also concerned about NVIDIA’s circular financing issues, as the company has invested in some of its key customers, such as OpenAI and CoreWeave. Nevertheless, NVIDIA has rarely failed to meet its earnings targets, so there is no substantial reason to question the $1 trillion revenue guidance put forth by Jensen Huang. Huang has also stated that the company will soon resume chip sales to Chinese enterprises—a business segment that has stalled for several quarters due to geopolitical issues but has historically been a significant source of revenue.
NVIDIA’s current market capitalization is approximately $4 trillion. Depending on the perspective, conclusions about its valuation vary. On one hand, NVIDIA’s five-year average P/E ratio is around 64 times, while its current P/E ratio is only 34 times; its five-year average price-to-book (P/B) ratio is 30 times, while the current P/B ratio is less than 26 times. For long-term investors who believe in AI’s ability to transform the world, this may seem like an opportunity to increase their stake in this AI leader at a reasonable price. However, the issue is that, on an absolute level, the stock remains expensive: the average P/E ratio for technology stocks is about 34 times, with an average P/B ratio of 8.5 times; the S&P 500’s average P/E ratio is about 28 times, with a P/B ratio of 5 times. If you lean toward value investing, you might still consider NVIDIA too expensive.
Beyond valuation, geopolitical conflicts have led to a sharp rise in energy prices, which also presents factors that require careful consideration. In summary, NVIDIA’s stock has dropped to a valuation on par with the broader market for the first time in a decade—does this represent a “once-in-a-lifetime buying opportunity”? Perhaps not exactly, but it is likely the best opportunity shareholders have had to buy the stock in years.
