Key Points
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Over the course of history, spending binges on technology trends often ended with massive stock sell-offs.
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Nvidia’s low valuation may have priced in such occurrences.
- 10 stocks we like better than Nvidia ›
The current state of Nvidia‘s stock (NASDAQ: NVDA) makes little sense on the surface. Despite reporting 85% yearly revenue growth in its latest quarter, the stock sells for just 32 times earnings, the same as the S&P 500‘s average P/E ratio.
Some of that may have to do with the gains of nearly 1,700% since the fall of 2022, or the implied growth limitations of its $5.1 trillion market cap when considering the law of large numbers. However, another possible explanation is the unprecedented spending on AI and the historical tendency for such spending sprees to end in disaster.
Admittedly, investors do not know whether the ghosts of events past are hampering the present growth of the chip stock. Still, even if it is true, should investors care? Let’s take a closer look.
Historical precedent and Nvidia
Indeed, this historical precedent is not one investors should dismiss. Experienced investors might remember how the internet spending boom of the late 1990s and early 2000s gave way to the dot-com bust. Looking further back, the boom in automobile spending in the 1920s ended with the Great Depression.
Big tech’s AI spending seems reminiscent of such spending sprees. Key hyperscalers pledged to spend $725 billion on capital expenditures (capex) alone. Much of that spending has gone to Nvidia hardware, as the company generated $81.6 billion in revenue in the first quarter of fiscal 2027 (ended April 26).
Also, analysts forecast an 82% revenue surge for fiscal 2027, though they also predict growth slowing to a 41% revenue increase for fiscal 2028.
One has to assume that the AI boom will not go on forever, and that slower growth could be a sign of further slowing in later years.
However, Nvidia’s massive size may partially explain that slowdown, as the higher percentage gains are more difficult to sustain as enterprises grow larger.
Additionally, Nvidia’s forward valuation of 24 makes it appear too cheap to ignore, and the forward one-year P/E ratio of 17 would arguably seem reasonable even in an AI bust. Thus, even if slowing growth causes a pullback, the decline would likely not be long-term.
Should investors stay with Nvidia?
Amid its growth and valuation, investors should not worry about history undermining the Nvidia investment thesis.
From what is known about the history of boom cycles, investors should assume that the AI boom will end at some point and should invest accordingly.
Nonetheless, the current state of Nvidia appears to insulate the stock from such an occurrence. Investors should expect slower growth after fiscal 2027, though revenue growth appears robust for as far as one can reasonably predict.
Moreover, Nvidia’s forward multiples are so low that they already seem to factor in such a slowdown. Although investors should not rule out the possibility of a near-term pullback and less stock price appreciation than in the past, Nvidia should remain safe even if the history of tech boom cycles points to pain later.
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Will Healy 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.
