Nvidia (NVDA) has a tantalizingly cheap P/E ratio.
Nvidia's forward price-to-earnings (P/E) multiple has declined steadily since August 2024, when artificial intelligence began to take hold, unleashing a boom in the company's stock price and earnings growth (see the graphic below). The decline has only accelerated this year despite a series of strong quarters.
The forward P/E ratio for Nvidia currently stands at 24 times, not too far removed from the S&P 500's (^GSPC) 21-times multiple, despite the company being one of the fastest-growing companies in corporate America.
Nvidia's stock rose 1% before the bell on Tuesday.
JP Morgan
So what gives with this valuation that many would call outright cheap?
A couple of things stand out.
For one, early in any supercycle, investors tend to bid up a stock based on speculative future earnings and cash-flow potential. As Nvidia delivers actual multibillion-dollar realized profits, speculative expectations transition into actual earnings.
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In short, it takes more for Nvidia, at its size, to wow investors and get them to pay a speculative-level P/E ratio. Looked at another way, Nvidia is increasingly being seen as a mature tech company — as crazy as that may sound for a company growing super quickly.
Secondarily, while Nvidia's stock price has appreciated significantly in recent years, investors naturally discount long-term growth due to potential cyclical risks — such as the digestion of future cloud capital expenditures, geopolitical trade policies, or supply chain bottlenecks.
So Nvidia's valuation does reflect several worthy concerns about a company that has grown at lightning speed over the past three years.
"Taking a step back, we still do not expect upside to near-term numbers to serve as a material positive catalyst for the stock — revenue guidance has beaten Street consensus by an average of 4% over the past four quarters, while the stock has traded down 3%/5% on average over the subsequent 7 to 30 days," JPMorgan analyst Harlan Sur wrote in a new note on Monday ahead of Nvidia earnings Wednesday.
In effect, to shake off the "cheap valuation" vibes, Nvidia will have to get its stock price rerated to show it warrants a more speculative forward P/E ratio.
Sur offered a few ways this rerating could happen:
