Nvidia (NASDAQ:NVDA) is among the best known stocks among novice investors. And there’s good reason for that. The tech giant has seen its share price surge 221% over the past 12 months. It’s now the world’s third most valuable listed company.
Some investors are attracted by stocks that have surged. Some are wary of them. But I think Nvidia still looks like good value, especially compared with its big tech peer group. It’s got one of the strongest price-to-earnings-to-growth (PEG) ratios among US blue-chip stocks. And it has built what appears to be a formidable economic moat. It’s a must-have for my Stocks and Shares ISA, and if I were starting today, it would be one of the first companies on my list.
The AI enabler
Nvidia is a key enabler of the revolution in artificial intelligence (AI). In fact, it’s practically the linchpin. Without Nvidia’s chipsets, much of what we’ve seen over the past 18 months wouldn’t have been possible. Originally designed for the computer gaming sector, the company’s graphics processing units (GPUs) have parallel processing capabilities that are perfectly suited to the heavy workload large language models (LLM) and generative AI create.
Nvidia has already sought to build on its commanding lead in chips for generative AI and LLM space. The company has made great strides from the A100 in 2021 to the H100 and H200 in 2023 and now the B100 in 2024. The H200 is 18x more powerful than the A100 and the B100 — also known as the Blackwell — offers double the processing power of the H200.
This innovation is important as it allows Nvidia to remain ahead of its peers and establish an economic moat of considerable strength. In turn, this moat contributes to some incredibly strong margins — Nvidia’s latest 12 months’ EBITDA margin is 56.6%.
Is it good value?
Several analysts have started suggesting that US stocks are becoming too expensive. As such, there’s a suggestion that money might start following into European equities. However, there are still pockets of value to be found in the US.
At face value, Nvidia doesn’t look cheap. It’s currently trading around 69.5 times earnings from the past 12 months. For context, the average price-to-earnings ratio for the S&P 500 is currently around 23.7 times. So, clearly Nvidia trades at something of a premium.
However, we need to look at what’s expected in terms of earnings to get a better idea of the company’s real value. It’s trading at 36.4 times expected earnings for 2024. And this forward ratio falls to 30 times for 2025, then 25.1 times for 2026, and 20.4 times for 2027.
Of course, there’s a risk that forecasts can be wrong. But there’s a lot of faith that Nvidia will remain central to the AI revolution. And it’s likely that a strong growth rate will be maintained beyond the forecast period.
Finally, Nvidia has a PEG ratio of 1.02. Normally a ratio of 1 suggests fair value. But it’s calculated using the medium-term growth rate and as such doesn’t take account of long-term forecasts. I’d also suggest that US blue-chip stocks will always trade at a premium. So, as it’s the cheapest of the Magnificent Seven, I see this PEG ratio as an indication that Nvidia remains undervalued.
