Up 1,400% in 5 years, Nvidia stock might still be 50% undervalued

Any stock that’s soared like Nvidia (NASDAQ: NVDA) in the past few years has to come with some amber flags. Here’s my first one.

The roughly 50% undervaluation I mentioned in the title is based on the highest price target I can find looking around broker forecasts. It’s at $220, and on the price at the time of writing (24 June) it would mean a 52% rise.

The average price target of approximately $177 would need a 22% price rise. And there’s even one who thinks we should sell and has a $100 target. But that’s just one Sell recommendation against more than 50 Buys.

Be cautious of targets

A price target alone is not something to base an investment decision on. They can reflect what an analyst sees as current under- or over-valuation, and they rarely say what anyone thinks might happen in the next five, 10 or more years.

But we can use them as a factor in our own analysis. They also help us understand what’s driving sentiment in the short term. But they only make sense when we see them in relation to a stock valuation and to future prospects.

We’re seeing no sign of demand for Nvidia chips slowing. Revenue in the first quarter of fiscal 2026 climbed 69% to $44.1bn, with earnings per share up 57%. Both beat Wall Street expectations — as Nvidia has a habit of doing.

Data centre revenue soared by 73%, and it seems that’s where a large portion of near-term growth is likely to come from. It’s worth watching gross margins though, dipping to 61% from 78.9% a year prior.

Things could go wrong

AI processing demand looks set to keep climbing. But Nvidia’s core architecture wasn’t designed for AI use. It just happens that the same thing needed for fast graphics — massively parallel processing — also fits AI needs.

But newer designs, not based on the need for graphics frame generation and synchronisation, could potentially take AI to the next level.

Competitors are also working hard to stuff more raw power into each generation of chips. Nvidia’s market dominance is not good for competitors. And it’s not what customers want either — having to rely on a single supplier is a big risk in any business.

Chinese developers are rushing to distance their country from the chokehold that US governments can have on their technological future. Only this week (24-26 June), the World Economic Forum is holding its ‘Summer Davos’ in China, focusing on innovation and entrepreneurship.

Buy Nvidia?

Wherever the technology lead goes, I can only see competition bringing profit margins down. And that raises a key question for potential Nvidia investors. Does the current valuation allow a sufficient safety margin to cover the risk?

Forecasts put Nvidia on a price-to-earnings (P/E) ratio of 35 for the 2026 fiscal year. And they have it dropping as low as 23 by 2028. That, to me, seems too low. Yes, Nvidia might be eclipsed by someone else some time. But I think growth investors should still consider it, even after such huge gains.

The post Up 1,400% in 5 years, Nvidia stock might still be 50% undervalued appeared first on The Motley Fool UK.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Nvidia. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.