Nvidia Stock Just Did This for the First Time in 13 Years. History Shows What May Happen Next.

Key Points

• Nvidia stock soared 500% over the past few years, but recently it’s been on the decline.

• The company is among those that led the S&P 500 higher during the earlier days of the AI boom.

Nvidia (NASDAQ: NVDA) has made many big moves in recent years, from launching the most powerful artificial intelligence (AI) chips and systems to becoming the first company to reach $4 trillion in market capitalization. The tech giant wisely identified the potential AI opportunity about a decade ago and set its sights on dominating the market. And this was the key move to unlock success.

Nvidia’s AI dreams came true, as it built out a complete AI portfolio including chips, networking tools, and more, and expanded its reach into a broad range of industries — from healthcare to automotive. All of this has translated into enormous levels of revenue and profit. Stock performance followed, with Nvidia’s shares soaring 500% over the past three years.

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But these days, Nvidia stock is struggling along with other stocks that earlier led market gains. These AI stocks and other growth players have fallen out of favor, at least temporarily, in today’s tough market environment. And against this backdrop, Nvidia stock just did something for the first time in 13 years. Here’s what history says may happen next…

Image source: Getty Images.

Soaring demand and revenue

So, first, let’s catch up on the Nvidia story over the past few weeks. As mentioned, Nvidia has been a stock market and earnings star thanks to its position in the AI market. The company has spoken of high demand quarter after quarter, and in its earnings report back in February, Nvidia said full-year revenue blasted higher by 65% to $215 billion.

But this great news hasn’t been enough to lift the stock price. Investors have worried about whether AI spending will be long-lasting at the current pace, with tech giants pledging to invest nearly $700 billion in infrastructure this year alone. The idea is that spending may outpace the revenue opportunity. Investors are also weighing the impact of the war in Iran on growth, and they haven’t been overly impressed with U.S. economic data.

All of this has led to a pullback in the growth stocks and industries that led gains over the past three years and a rotation into other sectors. And this has hurt Nvidia stock, pushing it to a decline since the start of the year.

Now, this brings me to the move I mentioned earlier. Nvidia recently did something for the first time in 13 years: its stock slipped to a lower valuation in relation to forward earnings estimates than the S&P 500. This is according to Dow Jones Market Data.

Nvidia and the S&P 500

Nvidia has recently fallen to 19x forward earnings estimates, compared with the S&P 500‘s average of about 20x. Now, let’s consider what history says about what may happen next. The chart below shows that every time Nvidia’s price-to-earnings ratio has sharply declined, it’s gone on to gain ground and climb once again.

NVDA PE Ratio (Forward) data by YCharts

So, if history is right, Nvidia stock may not trade at this discount for very long. Growth investors, seeing this as a buying opportunity, could soon return to Nvidia if they turn their attention to growth forecasts. The S&P 500 has an estimated 13% growth rate for the first quarter, according to FactSet data. Analysts expect Nvidia’s revenue for the current quarter to soar 77%.

It’s also important to note that the evidence we’ve seen so far supports the case for a long-term AI growth story. Companies across the AI spectrum, from chip designers to cloud service providers and software giants, have all spoken of soaring demand for AI products and services. As mentioned earlier, several major tech companies have pledged to spend billions this year to build out AI infrastructure, a move that implies tremendous growth for chip orders.

And AI customers are starting to apply AI to their needs — and this use of AI also requires compute. Finally, Nvidia’s strength across the AI stack, powering every aspect of the technology, should provide it with plenty of growth drivers as the AI story unfolds.

So, history says Nvidia’s valuation may not be down for long — and that makes this hot AI stock a fantastic buy on the dip.

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Adria Cimino 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.