By now, it's clear that artificial intelligence (AI) is the next major technology platform.
The new technology featured in chatbots like ChatGPT has rapidly gained adoption, and big tech companies are pouring tens of billions of dollars into data centers to run the computing power required for AI.
Thus far, Nvidia (NVDA -0.19%) has been the biggest beneficiary of this boom, and it's easy to see why. The company's graphics processing units (GPUs) have been flying off the shelves ever since ChatGPT launched, and demand continues to outstrip supply. Nvidia dominates market share of data center GPUs, a technology the company has been advancing for decades through innovations like its CUDA programming language that makes it easy for developers to write code that can be run directly on Nvidia's GPUs, and build high-performance applications.
For early investors, Nvidia has already delivered monster returns, but plenty of investors are wondering if the company's stock is still a good buy.
One example from recent history offers a good corollary.
Image source: Nvidia.
Take a ride in the wayback machine
In 2012, Apple (AAPL -1.69%) was the most valuable company in the world, riding high from the recent launch of the iPhone and the iPad.
On May 15, 2012, the company had a market cap of $517 billion.
As you probably know, Apple has continued to deliver strong returns to investors as it now has a market cap of around $3 trillion, but that's not only due to the growth in the business.
It's also because investors drastically underestimated its growth prospects. Perhaps because it was already the most valuable company in the world, the market assigned it a price-to-earnings (P/E) ratio of just 13.5. Investors seemed unable to envision the dramatic future growth of the iPhone or Apple's services business, built around the App Store, becoming a massive cash cow.
At the time, Apple was trading at a discount to the S&P 500, which was valued at a P/E of 15.9.
While Apple's market cap has risen about six times, or 500%, the growth in the stock price has been nearly 1,000%, or 11 times, due to share buybacks.
The gains in the stock were propelled not only by growth in the business. Apple also benefited from multiple expansion as the stock now trades at a P/E ratio of 33, accounting for a significant portion of the stock's gains.
Why it matters for Nvidia
There are a number of lessons to be taken away from Apple's path over the last 13 years and its valuation in 2012.
First, it's easy for investors to underestimate the potential growth of the world's largest companies. Investors can also underestimate the potential of the next big technological shift.
Back in 2012, mobile technology was just at its dawn, and the boom that would drive Apple and many other tech stocks higher was just picking up steam. However, instead of factoring that into Apple's valuation, investors seemed to ignore it.
Nvidia may be in a similar position today. While the semiconductor industry is notoriously cyclical, leading to skepticism about future growth for Nvidia and its AI peers, the stock looks surprisingly cheap. After a run-up over the last few weeks, Nvidia stock has gotten more expensive and now trades at a P/E of 45 and a forward P/E of just 31.
That compares to a 25.7 P/E ratio for the S&P 500 and a forward P/E of 20.5. On a forward basis, the stock is also cheaper than a number of slow-growth stocks like Walmart and Costco even as Nvidia is the driving force behind the most important technology today.
Nvidia might be trading at a premium to the S&P 500, but it's also growing much faster as analysts expect its revenue to increase 53% this year and 24% next year.
Nvidia might not become a ten-bagger like Apple was in 2012, but just like investors were underestimating the growth of mobile technology back then, there's a good argument that they're underestimating the growth in AI today. If that's the case, Nvidia is likely to be a big winner over the next five to 10 years.
