Nvidia now fits the profile of a growth-at-a-reasonable-price stock, according to Morningstar. The company emerged as the biggest AI beneficiary in 2023; as demand for its chips exploded, so did its stock price. Although Nvidia has continued to deliver strong earnings growth this year, its valuation has become more reasonable relative to growth projections and the fair value estimate.
Morningstar Chief US Market Strategist Dave Sekera recently highlighted Nvidia on The Morning Filter podcast, calling it one of five stocks to buy while still reasonably priced. With shares trading 30% below the $280 fair value estimate, the stock looks like a bargain. Nvidia provides the graphics processing units, hardware, software, and networking tools needed for the exponentially growing AI market.
In the long run, tech titans are expected to seek second sources or in-house solutions to diversify away from Nvidia, but these efforts will at best only chip away at the company’s AI dominance. Leading cloud vendors continue to invest in their own solutions, and AMD is working on GPUs and AI accelerators for data centers. However, Nvidia’s GPUs and Cuda platform are viewed as industry leaders.
Nvidia has a wide economic moat based on intangible assets around its graphics processing units and high customer switching costs around its proprietary software. GPUs perform parallel processing, which is at the heart of Nvidia’s dominance. Initially used for gaming, their parallel processing was found to efficiently run the matrix multiplication algorithms needed to power AI models. Nvidia’s Cuda software platform creates and hosts libraries, compilers, frameworks, and development tools that only run on Nvidia GPUs, creating high customer switching costs.
The $280 fair value estimate implies price/adjusted earnings multiples of 30 times for fiscal 2027 and 20 times for fiscal 2028. Given the acceleration in AI capital spending expected for calendar 2026, Morningstar models 80% total revenue growth for Nvidia in fiscal 2027. While this represents a peak due to the expanding revenue base, robust growth is anticipated in the years ahead. The company is expected to achieve mid-70s gross margins in fiscal 2027, with modest deterioration to the high 60s a decade from now. GAAP operating margins are expected to hover in the high 50s to mid-60s over the 10-year forecast.
The biggest risk is the pace of AI spending going forward. Spending comes from a handful of customers, all with incentives to eventually optimize or reduce investments. Tech leaders may turn to in-house chips for at least a portion of their workloads. Geopolitical risk and uncertainty also loom, notably US restrictions that have at times prevented Nvidia from selling AI products into China.