• Nvidia’s stock price has languished despite meteoric earnings growth.

• The business could mature into a steady performer with a lower growth rate, and the stock would still be a great buy.

• AI applications outside the digital world present a massive opportunity for Nvidia.

Nvidia's fourth-quarter fiscal 2025 (ended Jan. 26, 2025) earnings report rocked markets last week, with a sell-off in the major indexes on Thursday followed by a rebound on Friday.

As of March 2, Nvidia is down 7% year to date, underperforming the S&P 500 index's (^GSPC -1.22%) 1.2% gain. Given Nvidia's over 800% increase between 2023 and the end of 2024, investors may feel a pullback in the growth stock is only natural. But there are plenty of reasons why Nvidia is surprisingly cheaper than a chart of its stock price would suggest.

Image source: Getty Images.

Nvidia's valuation has come down

The price-to-earnings (P/E) ratio is a well-known financial metric that divides a stock's price by earnings per share (EPS).  The P/E ratio shows the multiple investors are paying for a company relative to its earnings. The higher the P/E ratio, the more expensive the stock based on trailing earnings.

The P/E ratio is helpful when analyzing companies with consistent business models and rangebound growth rates, especially blue chip companies like Apple, Microsoft, Home Depot, Coca-Cola, etc. But the metric can be a little less useful for companies that aren't yet profitable, are inconsistently profitable, or are undergoing a major transformation -- like Nvidia.

Nvidia's stock price has risen significantly in recent years, but so have its earnings. The company is growing so quickly that its valuation has actually gotten cheaper. This is especially true over the last nine months or so because Nvidia's stock price has stayed roughly the same while its earnings continue to soar higher.

Nvidia's P/E ratio has come down to 42.5 -- which may seem high given the P/E ratio of the S&P 500 is 29.8. But since Nvidia is still growing earnings rapidly, its forward P/E ratio, which is based on analyst consensus estimates for the next 12 months, is just 27.8 -- meaning that if Nvidia's stock price didn't move for a year, and it met estimates, it would have a valuation around the same as the S&P 500.

Explosive growth

Nvidia heavily depends on graphics processing unit (GPU) sales to hyperscalers like Amazon, Microsoft, Alphabet, and Meta Platforms. This recent development has led to exponential growth in Nvidia sales, operating income, and profit margins.

As you can see in the following table, Nvidia's revenue is up nearly eight-fold in five years, but operating income has increased over 18-fold.

Data sources: Nvidia, YCharts.

In fiscal 2025, Nvidia converted over 55 cents of every dollar in revenue into net income -- an unbelievable profit margin that is simply unheard of for a company of its size.

Virtually any stock is cheap if the company keeps doubling or tripling revenue and earnings yearly. But what happens when there's a cyclical slowdown in the semiconductor industry? Or if some of Nvidia's largest customers pull back on capital expenditures? Or if less computing power is needed to run complex artificial intelligence (AI) models, leading to lower GPU demand? Or if a competitor comes up with a formidable solution at a lower cost that erodes Nvidia's margins?

Every business faces uncertainties. And Nvidia certainly has its fair share of risk. But it also has plenty of opportunities, too. To quote Nvidia CEO Jensen Huang on the recent earnings call:

Models like OpenAI, Grok 3, DeepSeek-R1 are reasoning models that apply inference time scaling. Reasoning models can consume 100x more compute. Future reasoning models can consume much more compute. DeepSeek-R1 has ignited global enthusiasm. It's an excellent innovation. But even more importantly, it has open-sourced a world-class reasoning AI model.

In sum, Nvidia is encouraged, not threatened, by newer reasoning models like DeepSeek. Nvidia is also very optimistic about the potential for AI to expand beyond the digital world into robotics, physical AI development, autonomous vehicles, and more. All told, there's potential for Nvidia to be less dependent on hyperscalers in the future.

The impact of earnings growth on valuation over time

Buying Nvidia stock is a bet on continued AI adoption across different end markets and use cases. Over time, Nvidia's growth rate and margins will probably come down as AI becomes a more mature industry and because it is harder to grow a massive business as quickly as a smaller one.

But even if Nvidia's earnings growth slows to a compound annual growth rate of, say, 15% over the next 10 years, the stock is still a phenomenal buy. For context, consensus analyst estimates have Nvidia growing EPS to $4.49 in fiscal 2026 and then $5.72 in fiscal 2027 -- growth rates of 52.7% and 27.3%, respectively. So, earnings growth isn't expected to slow down to 20% per year anytime soon.

Still, let's pencil in a 20% earnings growth rate over 10 years. And let's say you only want to pay 25 times earnings for the stock. Here's what the stock price would look like under those assumptions. For context, Nvidia is $124.81 per share at the time of this writing.

Chart by author. Note: Stock Price is a calculation based on paying 25x earnings and assumes all else is equal.

Now, let's assume analyst consensus estimates are correct for fiscal 2026 and fiscal 2027, but then earnings grow at just a 15% compound annual growth rate for eight years after that. And that an investor only wants to pay 20 times Nvidia's earnings.

Chart by author. Note: Stock Price is a calculation based on paying 20x earnings and assumes all else is equal.

Even with a steep slowdown in growth and a multiple contraction to just 20 times earnings, Nvidia would still be a $300 stock in 10 years.

This exercise shows the power of earnings growth and how a premium-priced stock can be a better value than it appears at first glance.

Nvidia has the makings of an ultra-long-term holding

Too often, investors get bogged down by near-term factors, like whether a company will hit its quarterly projections or how the economy is doing.

But with Nvidia, the growth is so explosive that even a slowdown and a multiple contraction could still mean the stock will produce sizable gains over the long term. If hyperscalers pull back on spending, Nvidia still has tons of potential in other end markets like robotics, automation, and more.

Add it all up, and Nvidia's balance between risk and potential reward makes it simply too cheap to ignore.