Key Points
Nvidia stock has been trading lower over the past month, even as profit targets keep inching higher.
The headwinds are real, but Nvidia has thrived in climbing the wall of ultimately unfounded worry before.
The stock is up 380% over the past three years, but it’s trading near its forward earnings multiple’s lows.
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The artificial intelligence (AI) bellwether has had its bell rung lately. Is the ding a dinner bell for opportunistic investors? Nvidia (NASDAQ: NVDA) may have kicked off the AI revolution a couple of years ago, but the market has been rotating out of the global leader lately.
Nvidia stock has fallen 14% since hitting an all-time high in May. Despite inching higher through the first three trading days of this week, the shares are lower over the past month. It’s a stunning contrast to the overall market, which is clawing toward fresh highs.
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Image source: Getty Images.
Rotation out of the leading AI chipmaker while business is still booming is surprising, but it’s not without precedent. More importantly, it’s not likely to be permanent. Bullish market sentiment turning its buy order attention to the next step of AI beneficiaries, including memory and data storage manufacturers, earlier this year, isn’t outlandish, even if that segment has come under selling pressure in recent weeks.
You can go up and down the pick-and-shovel ecosystem in the near term. It just seems as if you can’t ignore the lead horse over the long run.
Nvidia stock is facing plenty of challenges right now, but they seem small compared to the opportunity. Let’s take a closer look at the company that continues to be the largest player by market cap, but one that is now the cheapest that it’s been in years, according to one popular valuation metric.
You can buy Nvidia for just 16 times next year’s earnings
You read that subhead correctly. Nvidia is now trading for 23 times this fiscal year’s earnings, but an even more jaw-dropping 16 times next year’s analyst profit target. There are some potential headwinds out there, and I don’t want to dismiss them.
China’s DeepSeek is making waves again. Its latest DSpark inference module reportedly improves AI rendering speed by up to 85% without requiring new hardware. If you can do more with existing hardware, there is no need to upgrade to Nvidia’s shiniest new chips. That’s not something you just sweep under the rug, but do you remember when Nvidia tumbled in early 2025, when DeepSeek made headlines? Nvidia’s growing client base needs reliability more than it craves the gamble of cutting corners.
Nvidia’s revenue has accelerated for three consecutive quarters. The 85% top-line jump it posted in its fiscal first quarter is the strongest increase in a year and a half. The growth rate isn’t sustainable, but it shows that the initial DeepSeek headlines didn’t slow Nvidia’s skyrocketing trajectory.
Bears can point to growing competition in AI chips and Chinese trade restrictions. Nvidia just had its first major debt offering in five years. Demand is outpacing the uptick in competitors and trade restrictions. Betting against Nvidia could be a mistake here, especially with Nvidia shares at their cheapest level in years.
It all adds up
The chart is interesting. The purple line is Nvidia’s stock, which has had a stellar run as a market leader, more than tripling over the past three years. The blue line is Nvidia’s earnings multiple for the current fiscal year. You see it drop come late January, when the baton is passed to the next fiscal year, but notice how hype exceeded reality in 2024 (Nvidia’s fiscal 2025) before normalizing a year later and outright reversing this year. The orange line — looking out to bottom-line forecasts for the following fiscal year — is understandably a year ahead of that swing in valuation momentum.
Saying that Nvidia is trading for just 16 times next year’s Wall Street profit target means that it’s cheaper than the S&P 500 itself. Should Nvidia really be trading at a discount to the market when it’s growing considerably faster? Nvidia’s growth will decelerate at this point, and margins may contract as rivals improve their hardware alternatives.
The problem — and your opportunity — is that this is the same bear case that has been debunked in recent quarters. Nvidia keeps getting stronger, and analyst profit estimates keep rising. In short, by the end of the next fiscal year, there’s a fair chance that Nvidia stock’s snapshot today was trading for a lot less than 16 times next year’s earnings.
Ding? It’s your move.
Should you buy stock in Nvidia right now?
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Rick Munarriz has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
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