Think You Missed Out on Nvidia's Stock Rise? Think Again.
Key Points
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Nvidia stock looks undervalued relative to its growth guidance.
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The data center GPU leader has good visibility into its future revenues.
Nvidia(NASDAQ: NVDA) has been one of the premier stocks to own over the past few years. It has risen by about 1,500% since the start of 2023, which may have many investors who didn’t buy shares earlier feeling like they’ve missed the boat. While the company is too large to be able to deliver those types of returns again, I think it’s still worth buying right now.
The reason? Nvidia expects huge growth next year, and none of it is priced into the stock.
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Nvidia is undervalued when next year’s projections are used
Nvidia is actually a pretty cheap stock by most valuation measures. It trades at 30 times trailing earnings, which is right where I’d expect a big tech stock to trade.However, that metric doesn’t take future earnings growth into account, and that’s where the opportunity is.
Nvidia has informed investors that it expects 70% revenue growth in its next fiscal year. If you’ve owned Nvidia over the past few years, it has outperformed expectations nearly every quarter, so this guidance should be taken with a grain of salt, as the actual growth rate could be meaningfully higher. Still, even if it is 70%, that leaves plenty of room for the stock to climb.
If we measure Nvidia’s stock relative to next year’s projected earnings, its valuation tumbles to about 15 times earnings.
NVDA PE Ratio (Forward 1y) data by YCharts.
Why is that significant? Well, we’ve already established that 30 times trailing earnings is a fair price for a big tech stock like Nvidia. So, if it hits that guidance, in order for Nvidia to once again be valued at 30 times trailing earnings at the end of next year, the stock price would have to double.
A double in a single year is a great return, and the growth that Nvidia says it’s expecting is likely locked in via sales deals it has already inked.
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Nvidia is a major supplier of computing units to the artificial intelligence (AI) companies. These companies are placing orders far in advance of when they’ll need the chips so that they’ll have supply available when they are ready to install them. Clearly, Nvidia has great visibility into its future revenues. Furthermore, more and more data centers are being constructed each year, and with AI still not widely used yet by the general population, the world will still need a massive amount of additional computing power to meet demand as more people adopt the technology.
All of this stacks up in Nvidia’s favor, and with the stock trading at levels that undervalue its likely growth trajectory, this is still a smart time to buy. So, if you think you’ve missed out on your chance to profit from Nvidia, you haven’t.
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Keithen Drury has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.