Image source: Getty Images
I’m one of those smug investors who bought Nvidia (NASDAQ:NVDA) stock in the early days of the artificial intelligence (AI) revolution. Despite this, my gains remain unrealised and my profit fluctuating wildly. That’s because the stock, along with many other US tech companies, have become incredibly volatile, with most of the pressure being downwards.
However, with that in mind, many investors, myself included, are now asking themselves whether Nvidia stock is undervalued. Let’s take a closer look at the data.
Valuation conundrum
Nvidia is starting to look a lot cheaper on a simple trailing price-to-earnings (P/E) ratio. The stock is trading 33.6 times trailing earnings. That’s the lowest it’s been in five years. Historical averages don’t tell us everything, but that’s a really important one to bear in mind.
However, this figure doesn’t give us the complete picture. The more important metric is the forward P/E ratio, which currently sits at 21 times. This demonstrates that the company is continuing to grow earnings — at least according to the forecast.
In fact, the expected average earnings growth rate over the medium term is 35%. In turn, this leads us to a P/E-to-growth (PEG) of 0.62. While the trailing P/E and the forward P/E may point to relative premiums versus the information technology average, this PEG ratio is a 53% discount to the average.
Of course, here lies a risk. The stock’s premium on near-term metrics and discount on long-term metrics suggests that the company is valued on future growth. What if that growth doesn’t come? That’s when the share price could come crashing down.
Building on the above, we can also see that the stock hasn’t traded so cheap on a price-to-sales basis since the AI revolution began in earnest.
Does it all come crashing down?
Nvidia has established a commanding lead in the AI chip market. Its accelerators hold between 70% and 95% of market share, driven by its advanced GPUs and the entrenched CUDA software ecosystem. However, there’s been a lot of noise in 2025. This empire could come under pressure.
Chinese newcomer DeepSeek has emerged as a significant disruptor, introducing AI training methods that could reduce reliance on Nvidia’s specialised chips and challenge the CUDA ecosystem. In the long run, more efficient AI models could reduce demand for Nvidia’s chips.
What’s more, geopolitical factors also loom large. President Trump’s often-changing tariff policies have injected volatility into the tech sector, with particular uncertainty around chip components and exemptions. While Nvidia has announced plans for US-based manufacturing to mitigate tariff risks, the company’s global supply chain remains exposed to policy shifts and export restrictions.
Moreover, competition from peers like AMD is intensifying as well. Time will tell if AMD is able to take some market share away from Nvidia.
So, there are several factors that could hinder Nvidia’s progress. However, the current earnings forecast and the PEG ratio suggest the stock is undervalued. It’s a mixed picture. I’m a little tempted to buy more, but the stock is so volatile. I may keep my powder dry for now.
