Historical patterns may explain why Nvidia’s stock price is undervalued
Judging from the surface data, NVIDIA ( : NVDA) The current share price valuation is puzzling. The company's latest quarter revenue surged 85% year-over-year, but the current price-to-earnings ratio is only 32 times, which is the same as the average price-to-earnings ratio of the S&P 500 index. Part of the reason for the low valuation may be that the stock has risen nearly 1,700% since the fall of 2022; on the other hand, Nvidia's total market value has reached US$5.1 trillion. Subject to the law of large numbers, the market acquiesces that its growth space will gradually narrow. But there is another interpretation: the world’s unprecedented and enthusiastic AI capital investment, referring to historical laws, this type of large-scale capital expansion boom often ends in an industry crisis. Historical bubble cycle comparison with NVIDIA Investors must not ignore historical precedents of past industry booms and collapses. Senior investors will remember that the capital frenzy in the Internet industry from the late 1990s to the early 2000s eventually evolved into the bursting of the Internet bubble; going back further, the investment boom in the automobile industry in the 1920s ended in the Great Depression. Currently, technology giants are gathering together to increase investment in AI, and the trend is highly similar to the above-mentioned capital mania. The major hyperscale cloud vendors have committed a total of US$725 billion in capital expenditures alone, the vast majority of which purchased NVIDIA hardware products - NVIDIA's revenue in the first quarter of fiscal 2027 (as of April 26) reached US$81.6 billion. Institutional analysts predict that Nvidia’s revenue growth will reach 82% in fiscal 2027, but revenue growth will fall back to 41% in fiscal 2028. The market generally reaches a consensus: the rapid expansion of the AI industry cannot be sustained forever, and a slowdown in growth often indicates that subsequent growth will further stall. However, NVIDIA's huge size is also an objective factor for the decline in growth rate: the larger the scale of the company, the difficulty of maintaining a high percentage of revenue growth will continue to increase. In addition, Nvidia's forward price-to-earnings ratio is only 24 times, and its valuation is too low to be ignored; even if it encounters a downturn in the AI industry, its one-year forward dynamic price-to-earnings ratio of 17 times still has a sufficient margin of safety. Therefore, even if the decline in growth triggers a short-term correction, the downward trend will most likely not continue in the long term. Should investors continue to hold Nvidia? Combining the company's growth fundamentals with the current low valuation, investors do not need to be shaken by historical bubble cycles to hold Nvidia's core logic. Referring to the history of previous industry booms and busts, investors should assume that the AI craze will eventually come to an end and plan investment strategies based on this. However, NVIDIA's current valuation level has reserved buffer space for the industry's downside risks. The market expects the company's growth to slow down after fiscal year 2027, but revenue will still maintain strong growth within a reasonably foreseeable period. More importantly, NVIDIA's forward valuation has fully priced in the expectation of a decline in future growth. Although the possibility of a short-term correction and slowdown in stock price growth cannot be ruled out, even with reference to the history of bubble bursts in the technology industry, Nvidia stock still has a relatively high safety position.