Keeping things simple when it comes to investing is sound advice. We can all be guilty of overcomplicating things on occasion, and sometimes the best investments can be right there in your own portfolios, meaning buying more of a stock you already own can be just as profitable as backing an entirely new one.
Which brings us to Nvidia (NVDA:NSASDAQ). You almost certainty already have exposure to the AI (artificial intelligence) chip champ, if not directly then through the cavalcade of index-tracking ETFs – global, US, technology – or via an actively-managed fund.
We all know the company as the chip designer which has captured early leadership in the emerging AI race. Over five years, Nvidia stock has amassed 1,440% gains from under $10, or 73% on an annualised basis. That’s nearly five-times the annualised return of the Nasdaq Composite (15.8%, according to Morningstar data).
LOOK THROUGH THE VALUATION
The obvious conclusion is Nvidia shares must be on a scorching valuation after such phenomenal success, but that’s not the case.
Stockpedia calculates Nvidia’s 12-month forward PE (price to earnings) multiple at 28.4 times, lower than other perceived AI winners like Microsoft (MSFT:NASDAQ) – 30.9, Broadcom (AVGO:NASDAQ) – 34.2 or Palantir (PLTR:NASDAQ) – 204.
Put it another way, investors have had only three opportunities since 2020 to buy the stock at this valuation or lower, and its average five-year PE multiple stands at around 43 times, based on Shares’ own back of an envelope calculation using a dozen peak and trough data points.
Moreover, Nvidia’s current PEG (price to earnings growth) ratio sits at a hugely attractive one times.
To square the circle, we have to look at just how rapidly Nvidia has been growing in recent years. Stockopedia calculates EPS (earnings per share) have grown at a CAGR (compound annual growth rate) of 91% since 2020, on 64% compound annual growth in revenue.
That’s impressive by any measure, but it’s truly staggering for a company of this scale, currently the world’s second-largest company at $3.35 trillion (behind Microsoft at $3.43 trillion and $350 billion bigger than Apple at number three).
What’s more, Nvidia’s pace of growth has been getting faster, not slower as the law of large numbers would suggest, peaking in the financial year to the end of January 2025 at 113% and 144% for revenue and EPS respectively.
WHAT DOES THE MARKET EXPECT?
Growth is surely bound to moderate, but by how much? According to Koyfin’s consensus data, the market is forecasting EPS of $1.00 on $45.6 billion revenue in the quarter to the end of July, implying roughly 50% year-on year growth on both metrics.
For the full year to January 2026, the consensus is pitched at $4.28 EPS on roughly $200 billion of revenue, new records both, and year-on-year growth is in the 45% to 50% ballpark.
‘This still seems like a unique opportunity to us,’ wrote Morgan Stanley analysts in a recent note. ‘The largest market-cap semiconductor company in the world is making a strong case that business will accelerate [AI investment] from here, while there is still significant anxiety — almost consensus — that conditions will decelerate,’ they add, referring to the market mood.
Nvidia’s most recent results impressed across multiple fronts, noted the analysts, as did Shares in a web-only story. ‘Gross margins ahead, revenues ex-China strong, networking recovering, positive commentary on the supply chain ramp on racks,’ the analysts stated.
While there was limited forward guidance on the second half of financial year 2026, Morgan Stanley attributed that restraint to geopolitical sensitivity around China. ‘Our view continues to be that we are materially under-shipping demand.’
They are far from alone. ‘In sum, the more tech earnings I see [this quarter], the more I am liking and feeling more bullish about the upside path for Nvidia,’ wrote Mizuho tech analyst Jordan Klein.
GROWING OPTIMISM
Klein’s increased optimism seems to be catching. Koyfin consensus currently implies 31% per year average growth in revenue and EPS out to full year 2028.
Putting this into context, these forecasts imply average three-year forward PE and PEG – a metric popular with many fund managers when analysing valuations for fast-growing companies – at 25.6 and 0.95.
Yes, things might not play out exactly as analyst project. Risks remain around restrictions on China, capacity constraints, global investment patterns against the uncertainty of US economic policy, and competition, where Nvidia is facing a joint US Department of Justice and Federal Trade Commission probe into its AI chip domination, accusations the firm has publicly defended.
These are all risks investors must accept before investing, yet none of this is new, and it looks to us that these threats are all priced in, where possible upside is not. Nvidia has beaten, if not smashed, expectations for 10 straight quarters.
In conclusion, while some investors may feel they already have enough Nvidia exposure in their portfolios, others may be open to adding more. That’s firmly Shares’ opinion.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
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