Like many high-growth stocks, Nvidia (NVDA 2.94%) shares looked expensive on a fundamental basis over the last three years, even as its price shot higher by almost 980%. Now, some investors likely feel they've missed out because shares trade at what would be considered a relatively high price-to-earnings (P/E) ratio.
However, there's an argument to be made that Nvidia is still an inexpensive stock. Here's a look at both sides of the discussion, including one chart that really tells the story that investors should focus on.
Image source: Getty Images.
Is Nvidia stock expensive, or is it a bargain?
Even with the stock's resounding three-year gain, its valuation has decreased when looking at price-to-free cash flow (P/FCF) and P/E ratios. That makes sense with sales exploding thanks to unprecedented demand for its GPU chips and other products supporting artificial intelligence (AI) infrastructure.
Both of those financial metrics hit one-year lows as recently as early April. The stock has surged higher since then, but both P/FCF and trailing P/E remain below their respective averages over the past 12 months. A P/E of almost 50 based on last year's earnings still may seem excessively high to some, but investors need to look forward, not back.
NASDAQ: NVDA
Key Data Points
An estimated forward P/E of about 35 is much more reasonable for a growth stock like Nvidia. And growth is what is driving the story. Ongoing global data center construction is driving unprecedented demand for Nvidia products. Clusters of servers containing its GPUs, networking products, and AI architecture power these centers.
That's led to rocketing sales in Nvidia's data center segment. A visual display of that growth is what should give investors confidence to buy the stock at recent levels.
Data source: Nvidia. Chart by author.
Nvidia's data center sales continue to increase to record levels every quarterly period. The company plans to release next-generation chips on an annual cadence as well. That should keep sales thriving and the stock moving higher as a result.
