Nvidia Corporation (NASDAQ:NVDA) shares have recently reached new all-time highs, currently trading at over $540 with a market cap of $1.31 trillion.
Despite this surging success, there has been widespread skepticism surrounding Nvidia’s continued market rally. Critics compare it to the dot-com bubble, branding it unsustainable and irrational. However, history tells a more nuanced story.
Doubters fail to recognize that Nvidia has been a leading performer on the Nasdaq for over a decade. In the past year alone, NVDA shares surged by nearly 246%, and over the last 10 years, they saw a staggering increase of over 13,200%.
But what’s truly confounding is that despite these soaring gains, Nvidia shares are actually cheaper now than they have been for the majority of the last 20 years. This counterintuitive fact is a consequence of the company’s exceptional fundamental growth.
Nvidia’s rally, therefore, is not simply driven by blind greed but is backed by robust fundamentals and continuously improving financials.
The true essence of the bullish outlook lies in Nvidia’s valuation. Despite the 246% surge in share price last year, analysts anticipate a further 268% rise in EPS once Q4 results are revealed. This discrepancy, combined with the underestimation of future 12-month growth potential by the market, presents a compelling opportunity.
From a trailing twelve months (ttm) perspective, shares may seem pricey, with a P/E ratio in the 50-46x range. However, considering the projected EPS growth of ~270% last year and ~70% this year, these multiples align favorably with a PEG (price/earnings to growth) basis. Moreover, on a forward-looking basis, NVDA is trading for roughly 26.5x, making it a cheaper option compared to several other prominent growth and defensive stocks.
While it might sound absurd, paying 23x for a blue-chip defensive stock growing at 8%, when you could pay 26x for a blue-chip tech stock growing at 70%, is not rational. In light of this, the projected 70% growth for 2023 may even prove to be conservative.