Is Nvidia undervalued? | The motley fool

These last few weeks have been brutal for Nvidia (NVDA -4.34%) investors. After hitting an all-time high of around $243 per share in early October, the artificial intelligence (AI) chipmaker experienced an epic selloff.

On November 12, Nvidia stock collapsed as low as $148.80 following the resignation of CEO Jensen Huang. Huang’s departure follows revelations about two extramarital affairs, including one involving a woman suspected of links to Chinese intelligence services. Nvidia’s board investigated the allegations, which did not establish that Huang compromised any company secrets.

Chief Financial Officer (CFO) Colette Kress is now serving as interim CEO while Nvidia searches for a permanent replacement. The uncertainty has shaken investors. However, the resulting sell-off created an attractive valuation opportunity.

Nvidia stock is trading at one of its lowest valuations in more than a decade. Here’s why I think the recent decline could represent an interesting buying opportunity.

Nvidia’s valuation is very cheap

A useful valuation metric for evaluating a growth stock is the forward price-to-earnings (P/E) ratio. This tool compares a company’s current stock price with analyst expectations for its earnings over the next 12 months. Simply put, a lower ratio means investors pay less for each dollar of anticipated profits.

As of this writing (November 12), Nvidia’s forward P/E is hovering around 11, according to data from Yahoo! Finance. This is the lowest figure dating back to May 2016, according to data compiled by TradingView.

For perspective, Nvidia traded for nearly 90 times its forecast earnings at the end of 2021. Nvidia has become a much larger and more profitable company since then, and yet investors are now attributing it a fraction of its former earnings multiple.

Of course, a lower multiple doesn’t necessarily mean a stock is undervalued. If Nvidia’s future earnings disappoint, today’s seemingly attractive valuation could prove misleading. Nonetheless, the historical comparison suggests that investors are pricing in considerable uncertainty about the company’s future.

Image source: Nvidia.

Nvidia’s profit growth makes its valuation attractive

Despite Nvidia’s stock price falling, its latest financial results show few signs of deteriorating demand. During its fiscal 2027 second quarter, Nvidia generated $96.2 billion in revenue, a 106% year-over-year increase. Data center activity contributed $89 billion, an annual growth of 117%. Meanwhile, adjusted earnings per share jumped 120% to $2.22.

These results reflect the enormous spending on AI infrastructure of Microsoft, Amazon, Alphabet, Metaplatforms, OracleAnthropic and OpenAI. Nvidia’s Blackwell GPUs are at the heart of many hyperscale projects, while its new Vera Rubin architecture enters production. The company is also expanding into Vera processors, high-speed networking equipment and specialized AI inference accelerators.

Above all, Nvidia expects its momentum to continue. Management’s guidance for the fiscal third quarter calls for revenue of $108 billion, plus or minus 2%. This would represent growth of approximately 89% compared to the same quarter last year.

Nvidia is expected to release these results on November 17. If the company delivers another strong quarter and maintains an encouraging outlook, investors may begin to reevaluate whether its valuation profile accurately reflects its growth trajectory.

Is Nvidia Stock a Buy After Jensen Huang Resigns?

There is an important distinction between an undervalued stock and a risk-free investment. Huang was instrumental in developing Nvidia’s technology roadmap, building customer relationships, and strengthening its competitive advantages.

Competitors such as Advanced microdevices And Broadcom are working to capture more spending on AI infrastructure. Additionally, many of Nvidia’s largest customers are developing custom silicon, potentially reducing their reliance on the company’s GPUs over time.

Still, Nvidia’s moat isn’t going to crack simply because of a leadership transition. The company’s CUDA software ecosystem, advanced chip designs, networking technology and customer relationships help provide strong barriers to competition.

At around 11 times forward earnings, I believe Nvidia’s recent decline has created a unique opportunity for long-term investors. To me, Nvidia offers an unusually compelling combination of growth and valuation.

While Nvidia stock will almost certainly experience additional volatility as investors evaluate the company’s next CEO, investors willing to tolerate this uncertainty by investing in Nvidia at a substantial discount to its historical valuation could experience lucrative gains as the buildout of AI infrastructure continues to accelerate.