So Nvidia (NASDAQ: NVDA) is a growth stock, and we always make a distinction between those and value stocks, right? I mean, it’s soared by by a massive 1,300% and more over the past five years. After such a stunning performance, the stock’s price-to-earnings (P/E) valuation must surely be up with the biggest.
How close is Nvidia to the P/E we see at its fellow AI hope, Tesla? Tesla stock commands a forward P/E of around 270 at the moment. But Nvidia, nope… it has a P/E of only 22 based on forecasts for the current fiscal year. That would drop to about 16 if next year’s forecasts come good. And by 2029 we could see it under 14.
Cheap by both standards?
That mooted 2029 valuation would made Nvidia look cheap even by the standards of the FTSE 100. And the Footsie’s traditionally valued significantly below US indexes. The S&P 500 right now has a forward P/E up at 25. So Nvidia even today looks like a cheap value stock compared to that benchmark.
There must surely be some flaws in this reasoning though, right? Maybe not.
Value vs growth
Nvidia stock has echoed previous growth stock booms, but there’s a key difference. Many times in the past, shares have soared well in advance of anticipated earnings. That’s happening with Tesla right now, where the valuation isn’t based on car sales. No, it reflects hopes the company will dominate autonomous driving, robotics, and a host of AI-based things.
But Nvidia’s profits are already here. Fourth-quarter revenue, reported in February, rose 73% from the same quarter a year previously. Earnings per share climbed 82% year on year. Oh, and free cash flow soared 125% from Q4 last year.
If earnings growth can keep pace with share price growth, then that can indeed lead to a rocketing share price remaining in step with valuation. And sometimes there really is no difference between a growth stock and a value stock.
Chain of events
The problem is, the current low P/E valuation depends on a series of assumptions. The key one is that today’s levels of AI spend will continue, and even accelerate. The Magnificent Seven are predicted to plough around $680bn into capital expenditure in 2026. But we’ve already seen doubts of sustainability creeping in.
Do I think AI is going to change the world? Yes. Remember when the internet was changing everything, but we didn’t quite know how yet? That’s where I see AI today. But there’s still a long way to go, and I expect stops and starts with investment and rollout.
The winners?
I also expect some spectacular failures along the way. And I won’t pretend to know who’ll come out on top 10 or 20 years from now.
But I‘m convinced that some of today’s AI leaders will reward shareholders substantially in the coming decades. And that’s why I think Nvidia stock’s definitely worth considering today — whatever current valuation measures say, really.
