Is Nvidia's Stock Overvalued Or Undervalued?

NVIDIA Corporation NVDA shares have outpaced the S&P 500 in 2021, generating a year-to-date total return of 58.8%.

Nvidia is still putting up strong growth numbers, but with a $527 billion market cap, some investors are wondering if there’s any value left in Nvidia stock.

Earnings: A price-to-earnings ratio (PE) is one of the most basic fundamental metrics for gauging a stock’s value. The lower the PE, the higher the value. For comparison, the S&P 500’s PE is currently at about 33.9, more than double its long-term average of 15.9.

Nvidia’s PE is currently 74, more than double the S&P 500 average as a whole. Nvidia's PE ratio is up 65.2% over the past five years, suggesting the stock is currently priced at the high end of its historical valuation range.

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Growth: Looking ahead to the next four quarters, the S&P 500’s forward PE ratio looks much more reasonable at just 20.7. Nvidia’s forward earnings multiple of 44.6 is still more than double the S&P 500 as a whole, making Nvidia stock look overvalued.

Nvidia’s forward PE ratio is significantly higher than its technology sector peers, which are currently averaging a 25.8 forward earnings multiple.

Yet when it comes to evaluating a stock, earnings aren't everything.

The growth rate is also critical for companies that are rapidly building their bottom lines. The price-to-earnings-to-growth ratio (PEG) is a good way to incorporate growth rates into the evaluation process. The S&P 500’s overall PEG is currently about 1; Nvidia’s PEG is 2.2, suggesting Nvidia is currently overvalued even after accounting for its impressive growth.

Price-to-sales ratio is another important valuation metric, particularly for unprofitable companies and growth stocks. The S&P 500’s PS ratio is currently 3.1, nearly twice its long-term average of 1.62. Nvidia’s PS ratio is 24, nearly eight times higher than the S&P 500.

Finally, Wall Street analysts see at least some value in Nvidia stock over the next 12 months. The average analyst price target among the three analysts covering Nvidia is $232, suggesting about 13.3% upside from current levels.

The Verdict: At its current price, Nvidia stock appears to be extremely overvalued based on a sampling of common fundamental valuation metrics.