Nvidia's (NVDA 0.33%) hot stock performance has eased of late as shares of the high-flying chipmaker have pulled back 5% since the beginning of September, which might seem a tad surprising at first considering the outstanding quarterly report it delivered toward the end of August.
It looks like investors decided to take some money off the table because they could be concerned about Nvidia's ability to sustain its momentum. The company's shares more than tripled in 2023 as customers have been lining up to buy its artificial-intelligence focused graphics cards.
NASDAQ: NVDA
Key Data Points
However, savvy investors might be wondering if they should use this pullback as an opportunity to buy the stock. That decision could hinge on two factors: Nvidia's valuation and its long-term prospects.
Let's check if its valuation is attractive enough to consider buying it and then move on to the company's prospects over the next three years to see if they are solid enough to deliver more upside.
Nvidia is expensive, but that's half the story
There is no doubt that Nvidia stock is richly valued. The price-to-sales ratio is 35, which is way higher than its five-year average sales multiple of 19.6. The sales multiple shot up tremendously this year thanks to the stock's impressive rally, but it is worth noting that the company's revenue has grown at a faster pace.
NVDA PS ratio data by YCharts.
There is a similar story with the company's price-to-earnings ratio, which currently stands at 110. The terrific year-over-year growth in earnings per share last quarter explains why the earnings multiple has come down drastically in recent months.
NVDA PE ratio data by YCharts.
Nvidia is growing fast enough to justify its valuation, and more importantly, the company is relatively cheaper right now as its sales and earnings multiples have dropped due to the amazing growth last quarter. And its forward sales and earnings multiples are substantially lower than the trailing multiples.
NVDA PE ratio (forward one-year) data by YCharts.
The reason for the lower forward multiples is the tremendous growth that Nvidia is expected to deliver in the future. Its top line is forecast to jump to $82 billion in fiscal 2025, triple the fiscal 2023 revenue of $27 billion. Analysts are projecting its earnings to increase to $16.98 per share in fiscal 2025, a fivefold jump from its fiscal 2023 earnings of $3.34 per share.
These projections suggest that Nvidia seems capable of maintaining its outstanding growth over the next couple of years, though don't be surprised to see it do so for a longer time.
Solid prospects point toward more upside
AI is the biggest catalyst for Nvidia right now, with its graphics processing units (GPUs) in massive demand because of their ability to train large artificial intelligence (AI) models. The demand for the company's AI-focused GPUs is so strong that customers are reportedly having to wait six months to get its flagship H100 data center graphics card.
Taiwan Semiconductor Manufacturing estimates that those data center GPUs could be in short supply for the next year and a half, but Nvidia is taking steps along with its suppliers to improve their availability. Microsoft chief technology officer Kevin Scott recently said that his company is now finding it easier to get Nvidia's chips.
Nvidia chief financial officer Colette Kress said on the August earnings conference call that the company expects supply to increase each quarter through next year, which should put it in a good position to cater to the demand for its GPUs. The Financial Times reports that Nvidia might even triple its output of H100 GPUs next year, which could help the company deliver faster growth than analysts are anticipating.
Market research firm Gartner estimates that the market for AI semiconductors will see secular growth, generating $119 billion in annual revenue in 2027 as compared to $53 billion this year. Jefferies analyst Mark Lipacis estimates that Nvidia's share of AI chips stands at 85%, so the company could deliver the $96 billion revenue that analysts are expecting in fiscal 2026.
NVDA revenue estimates data by YCharts.
Multiply the estimated top line in fiscal 2026 with Nvidia's five-year average sales multiple of 19.6, and its market cap could increase to $1.88 trillion in the next three years. That would be a 66% jump from current levels, which means that investors who buy this AI stock now can expect healthy gains over the next three years.
