Nvidia (NVDA 3.17%) is one of the hottest stocks on the market today. Over the past five years, Nvidia shares have soared in value by nearly 1,500%, including another 20% in the last 12 months.
Think the run is over? Think again. Nvidia stock remains far cheaper than most investors realize due to one critical factor.
NASDAQ: NVDA
Key Data Points
Nvidia's profits will rise for decades to come
The artificial intelligence (AI) revolution is in full swing. But we're still in the early innings. In 2023, the United Nations estimated the global artificial intelligence market to be worth roughly $190 billion. By 2033, the organization believes the AI market's value will soar to nearly $5 trillion. That's a compound annual growth rate of more than 30%.
Thus far, Nvidia's growth rates have exceeded the AI market's growth rate. Last year, Nvidia's sales more than doubled. This year, analysts expect sales to jump again by more than 50%.
NVDA Revenue Growth Estimate for Current Fiscal Year data by YCharts
Why is Nvidia growing faster than the market overall? Because it rapidly gained market share due to its superior hardware and software offerings. Right now, Nvidia is estimated to have more than 90% of the AI GPU market. Its new Blackwell chips were at one time sold out for more than 12 months. Essentially every cloud computing infrastructure business on the planet is racing to buy more Nvidia products. Nvidia's CUDA developer platform, meanwhile, keeps customers locked in to its hardware and software ecosystem.
In summary, through early investment, Nvidia has the best AI GPUs on the market from a performance standpoint. Its software integration, meanwhile, ensures developers are locked in to their products for the long haul. All of this has allowed Nvidia to post an industry-leading gross margin -- more than double that of competitors like Intel. While competition will emerge, Nvidia has gained a critical capital and reputational advantage -- an advantage that should persist for years to come, allowing it to charge more for its products than the competition.
Image source: Getty Images.
Patient NVDA investors will profit most
Trading at 27 times sales, Nvidia stock looks incredibly pricey for a $4 trillion business. On an earnings basis, shares trade at 53 times trailing earnings. Again, this looks expensive at first glance. But sales have a strong potential to grow by more than 30% per year for a decade or more. And given Nvidia's competitive advantages, profits should closely track this growth, even if margins do compress somewhat due to rising competition.
On a forward earnings basis -- that is, based on what analysts expect Nvidia to earn next year -- shares trade at just 38 times 2026 earnings. That's already a much more palatable valuation. Add another two years of 30% profit growth and shares suddenly trade at just 22 times 2028 earnings. And remember, Nvidia could continue to grow at this rate through 2033 and beyond.
So yes, Nvidia stock is expensive up front. But for long-term investors willing to spread that upfront premium over a long holding period, shares are surprisingly cheap. But only if you're willing to stay patient for years, or even decades at a time.
