At first glance, the current valuation of NVIDIA (NASDAQ: NVDA) appears puzzling. The company's latest quarterly revenue surged 85% year-over-year, yet it trades at a price-to-earnings ratio of just 32, aligning with the S&P 500 average.
One reason for this seemingly low valuation could be the stock's staggering ascent of nearly 1700% since the fall of 2022. Furthermore, with a total market capitalization now at $5.1 trillion, the law of large numbers suggests the market anticipates a natural deceleration in its growth potential. However, another interpretation exists: looking at historical patterns, the unprecedented global frenzy of AI capital investment often culminates in industry-wide crises.
Historical Bubble Cycles Compared to NVIDIA
Investors cannot ignore historical precedents of boom-and-bust cycles. Seasoned market participants recall the internet capital mania of the late 1990s and early 2000s, which ended with the dot-com bubble bursting. Looking further back, the automotive investment boom of the 1920s concluded with the Great Depression.
The current scramble by tech giants to pour capital into AI mirrors these past episodes of capital fervor. Major hyperscale cloud providers have collectively pledged $725 billion in capital expenditures alone, a significant portion of which is being spent on NVIDIA's hardware—evidenced by the company's Q1 FY2027 (ended April 26) revenue reaching $81.6 billion.
Institutional analysts project NVIDIA's revenue growth for FY2027 could reach 82%, but forecast a slowdown to 41% for FY2028.
A market consensus has formed: the AI industry's breakneck expansion cannot persist indefinitely, and a growth slowdown often foreshadows a further deceleration.
NVIDIA's sheer size is also an objective factor in this projected slowdown: the larger a company becomes, the more challenging it is to maintain high-percentage revenue growth rates.
Despite this, NVIDIA's forward P/E ratio stands at a notably low 24 times, a valuation too cheap to ignore. Even if an AI industry downturn materializes, a one-year forward P/E of 17 offers substantial downside protection. Therefore, while a growth deceleration might trigger short-term pullbacks, a prolonged decline is unlikely.
Should Investors Continue Holding NVIDIA?
Considering the company's fundamental growth trajectory alongside its current low valuation, investors need not be swayed from the core investment thesis by historical bubble cycles.
Referencing the history of industry booms and busts, investors should operate under the assumption that the AI hype cycle will eventually conclude and plan their strategies accordingly.
However, NVIDIA's present valuation already provides a buffer against industry downturn risks. Market expectations for slower growth post-FY2027 are already factored in, yet revenue is projected to remain robust over a reasonably foreseeable horizon.
More critically, NVIDIA's forward valuation has already priced in expectations for future growth deceleration. While the possibility of short-term corrections or slower price appreciation cannot be ruled out, even when measured against the history of tech bubble bursts, NVIDIA stock appears to offer a relatively high margin of safety.
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