My coverage of Nvidia (NVDA -0.98%) comes with an investing regret. Though I have covered it since 2017, I passed on adding shares because I perceived it as overvalued. Then, when it experienced retracements of over 50%, as it did in 2018 and 2022, I saw that as a pullback from its overvalued status.
Dismissing Nvidia as overvalued cost me the nearly 5,2300% gain it has made over the last nine years, and the 2018 sell-off that I thought was huge at the time barely shows up on its price chart today.
Moreover, even with that gain, its price-to-earnings ratio (P/E) is 33. At that number, I would argue that it is not overvalued, and here's why.
Image source: The Motley Fool.
Why I do not own Nvidia now
Full disclosure: Nvidia is no longer my type of stock. For now, I only buy growth stocks with the long-term potential for 10-bagger growth or higher, or dividend stocks that offer a generous and growing stream.
Neither of these criteria describes Nvidia today. Although I believe it will continue to beat the S&P 500, I worry about the law of large numbers since its market cap is now around $5.2 trillion. This means that for it to rise 10-fold, its market cap would have to reach $52 trillion, a huge feat when no stock has yet reached $6 trillion.
As for its income potential, investors might wonder why I am not interested in its payout, given the 25-fold increase in the dividend in the last quarter. That increase is notable, but its dividend yield remains under 0.5%, well below the S&P 500 return of more than 1%.
The state of Nvidia stock
However, it remains an excellent stock to hold, and even a buy for other types of investors. With regard to that 33 P/E ratio, it's only slightly above the S&P 500 average of 30.
Furthermore, Nvidia isn't growing like a company trading at 33 times earnings. In the first quarter of fiscal 2027 (ended April 26), revenue increased by 85% to nearly $82 billion. Also, because it kept expense growth in check, net income grew 211% to $58 billion.
NASDAQ: NVDA
Key Data Points
This is not a one-time event, either. Revenue grew 65% in fiscal 2026, and analysts forecast a 97% increase in the coming quarter. Also, it holds over $80 billion in liquidity, and since it spent only $6.6 billion on capital expenditures (capex) over the last year, it is in an extremely strong financial position.
Obviously, 33 times earnings is a low price for such a company and arguably pays investors to deal with the worries surrounding Nvidia, which they should understand.
Signs of concern
Some investors like me may be looking for growth that is unhampered by the law of large numbers. Analysts forecast a 44% revenue increase in fiscal 2028. That is still huge for a company of Nvidia's size, but it also represents a substantial slowdown from past years.
Others may worry about the sustainability of the AI building boom. The top four hyperscalers plan $760 billion in capex in 2026 alone. That level of spending leaves investors wondering how much longer it can continue to grow.
And some analysts claim that Nvidia is engaging in circular financing, in which it funds customer purchases that help sustain its growth. Management recently announced it had a memorandum of understanding with six major Wall Street investment firms to provide $500 billion for artificial intelligence (AI) infrastructure.
Time will tell whether that eases investor concerns. Circular financing contributed to the demise of Lucent and Nortel in the early 2000s. Nvidia's liquidity should insulate it from such an outcome, but it may not avert a stock sell-off if an AI bust occurs.
Nvidia and valuation
As conditions stand today, I think it's an undervalued stock, and I regret not buying when I started covering it nine years ago.
It's still not a stock for everyone. The law of large numbers will likely slow growth. Also, if efforts to finance the AI infrastructure boom fall through, the 33 P/E ratio may not be low enough to avert a sell-off.
Nonetheless, that valuation is extremely low given its revenue growth. And even if the feared AI bust occurs, its growth should continue, just as internet use kept growing after the dot-com bust. Thus, for anyone looking for a safe place to store wealth while earning long-term returns, I believe Nvidia should remain an excellent choice.
