Nvidia (NVDA 0.80%) is now one of the largest companies in the world. When it comes to AI stocks, Nvidia tops the list. The company produces the most sought-after component for the AI industry: specialized GPUs (graphics processing units) that allow for the training and deployment of complex artificial models.
Despite a market cap of roughly $3 trillion, Nvidia shares are surprisingly cheap according to one popular metric.
NASDAQ: NVDA
Key Data Points
Nvidia is a dominant AI stock
Nearly every AI application used globally today -- whether it's a consumer product like ChatGPT or a neural network used only by a few companies -- leverages cloud computing infrastructure to run. Otherwise, AI developers would need to buy their own infrastructure, adding considerable expense and time. And when it came time to scale up the business, those developers would need to buy even more infrastructure, making scaling up both costly and a long-term project. Cloud infrastructure allows dynamic scaling using rented servers that can operate anywhere.
What do all those servers run on? Specialized chips called GPUs. Amazingly, Nvidia controls around 90% of the market for data center GPUs, a reflection of its early investment and strategic vision. The company's GPUs are so in demand that its latest generation was sold out for 12 months at one point. The company's gross margins are also considerably higher than those of competitors like Advanced Micro Devices and Intel, a testament to how much end users crave Nvidia's GPUs.
Nvidia is sitting on a dominant market position just as the AI industry takes off. The United Nations, for instance, believes the AI market will grow from $189 billion in 2023 to nearly $5 trillion by 2033. According to some metrics, Nvidia shares look very expensive, a result of all this potential growth being baked into today's stock price. But according to one critical metric, shares remain surprisingly cheap.
Proof that NVDA shares are surprisingly cheap
You would think that a high-quality stock with such an exciting long-term growth trajectory would be priced at a steep discount. Make no mistake: Nvidia is priced at a healthy premium to the market. But shares aren't as expensive as you'd suspect, especially when you look at its earnings power. With the S&P 500 trading at 28 times earnings, Nvidia shares trade at a premium of around 44 times earnings. But its earnings growth is far higher than that of the average S&P 500 company. Pricing in the next 12 months of expected profit growth, the S&P 500 trades at 21 times forward earnings, while Nvidia trades at just under 30 times earnings -- a much more palatable price to pay.
NVDA PS Ratio data by YCharts
A few years down the road, Nvidia shares could be priced very similarly to the S&P 500 based on today's purchase price. That's an incredible bargain for such a profitable company, one that should grow by heavy double digits for many, many years to come. The trick here is patience. Investors must be willing to hold on long enough for that initial premium to be justified through long-term growth.
Nvidia is a classic example of how patient investors can secure an attractive bargain on blue-chip stocks like Nvidia. The only special ingredient you'll need is time. But based on the company's dominant market share and the high growth of its underlying market, this is a stock for which patience could pay off big years down the road.
