Nvidia (NASDAQ: NVDA) has been the most influential stock this year, posting huge gains in the process. The artificial intelligence (AI) leader’s revenue and profits have continued to grow at an impressive pace, and the company’s share price is up about 180% so far this year.
That’s just the latest part of an incredible run that has seen the company’s share price rise nearly 860% since the start of 2023, and more than 2,650% in the past five years. Thanks to these explosive profits, the company’s price-to-earnings ratio has risen to 66 at the time of writing.
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Such a valuation comes with high growth expectations, and it’s not unreasonable to worry that the chip company’s stock price has risen too fast and too far. But there’s another valuation metric that suggests the red-hot AI stock still has upside potential.
The stock’s gains don’t seem excessive in light of Nvidia’s recent operating results. For example, revenue rose 205% year over year in the first half of fiscal 2025 (the six months ending July 28, 2024) – and earnings per share rose 285% over the same period.
With expectations that its impressive growth will continue, Nvidia is trading at a price-to-earnings-growth ratio (PEG) of around 0.36. A PEG ratio of less than 1.0 is often seen as a signal that the stock is undervalued, because expected earnings growth is high relative to the earnings-based valuation.
While there’s no doubt that Nvidia’s revenue and earnings growth will eventually have to slow, the company’s leadership position, momentum and PEG ratio suggest the stock still has room to perform. With the next generation of Blackwell processors scheduled to launch later this year, the company could have another major revenue and profit catalyst in the near future.
Spending on GPUs to power AI applications will undoubtedly see some cyclical shifts, but the rise of artificial intelligence is still in its infancy – and Nvidia remains essential to that rise.
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Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
Do you think Nvidia stock is expensive? This Chart Might Change Your Mind was originally published by The Motley Fool