Nvidia (NASDAQ:NVDA) stock’s surge represents one of the greatest investing stories of the past decade. Now, it’s trading at 70x TTM earnings and 46.5x forward earnings. It’s by no means cheap on near-term metrics, but the growth forecast is second to none, so I don’t believe the stock is too expensive. I’m bullish on Nvidia, noting growth forecasts and its valuation relative to other members of the Magnificent Seven, but I appreciate that investors should always be wary of forecasts.
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Nvidia’s Growth Story
Nvidia stock has gone from strength to strength over the past 18 months. With consistent upside surprises and as the real size of the artificial intelligence revolution (AI) has become clearer, the stock has hit heights that would have once seemed unimaginable. However, much of the stock’s intrinsic value remains in the future.
Nvidia is projected to register earnings per share (EPS) of $2.71 in the financial year ending January 2025. This is up from $1.21 reported in the 12 months to January 2024. It’s a very impressive jump and one that is expected to be sustained throughout the medium term. Moving to the financial year ending 2026, Nvidia is forecasted to register EPS of $3.58. In 2027, analysts are forecasting EPS of $4.16.
One thing that is worth recognizing is that the number of analysts making forecasts about the company’s earnings falls as we move toward the long run. There are currently 50 analysts projecting earnings until 2026, but this falls to 24 in 2027 and just two by the end of the decade. As such, investors should put less emphasis on the “consensus” as the number of analysts decreases.
However, for interest sake, the one analyst that covers Nvidia stock through to 2034 suggests that the company will register EPS of $8.41 in the final year. That would represent a nearly 600% increase from 2024 and a forward P/E ratio of 15.1x.
Returning to the medium-term forecasts, the consensus is that EPS will grow by 31.74% over the next three to five years. It’s very hard to find growth like this anywhere else in the S&P 500 (SPX). This also leads us to a forward price-to-earnings-to-growth (PEG) ratio of 1.42x.
Nvidia’s PEG Versus the Magnificent Seven
The PEG ratio is an important metric for forward-thinking investors. Unlike purely historical metrics, it looks beyond the present by factoring in a company’s projected earnings growth. However, it’s equally important to acknowledge that the PEG ratio’s underlying growth forecasts are estimates and can be incorrect, especially the further we look into the future. This injects a degree of risk into the equation. Nonetheless, the metric remains my first port of call.
So, while many analysts have been suggesting that Nvidia stock has become too expensive, my eye has been drawn back to the PEG ratio and some useful comparisons with the rest of the Magnificent Seven — the seven mega-cap tech stocks that vastly outperformed the market in 2023. The PEG ratio of the Magnificent Seven ranges from 1.35x to 6.4x. The average PEG ratio for the Magnificent Seven is 2.6x.
As such, Nvidia stock is trading at a significant discount to the Mag Seven PEG average, and only Alphabet (NASDAQ:GOOGL) and Meta (NASDAQ:META) are cheaper. To me, this data certainly suggests that Nvidia stock could push higher.
Of course, there are caveats. With the exception of Tesla (NASDAQ:TSLA), Nvidia is the most expensive stock using the forward P/E ratio. Nvidia’s intrinsic value will hinge on the company’s ability to deliver on earnings expectations and maintain investor confidence in its long-term growth trajectory more so than its Magnificent Seven peers.
Moreover, some analysts have warned that the current growth rate may be short-lived. Nvidia is the kingpin of the artificial intelligence (AI) revolution. Its graphics processing units (GPUs), originally made for graphics rendering, have parallel processing capacities, making them the undisputed leader in AI processing. However, some analysts believe hyperscalers are frontloading their spending on GPUs. Personally, I’m not convinced by this argument and back the consensus forecast.
Is Nvidia Stock a Buy, According to Analysts?
On TipRanks, NVDA comes in as a Strong Buy based on 38 Buys, three Holds, and one Sell rating assigned by analysts in the past three months. The average Nvidia stock price target is $157.86, implying 24.9% upside potential.
The Bottom Line on Nvidia Stock
Nvidia stock has surged on multiple occasions over the past 18 months, with the company continually outperforming expectations. For many investors, the stock’s forward P/E ratio of 46.5x is simply unpalatable. However, Nvidia’s growth projections and PEG ratio are much more appealing.
I think it’s important for investors to recognize that forecasts can be wrong, and stocks often fail to live up to their expectations. Of course, forecasts can be too cautious, and Nvidia could outperform projected earnings in the coming years. Nevertheless, this uncertainty should be reflected in the valuation, and compared with some of its big tech peers, it is. I remain bullish on Nvidia over the long run.
