Nvidia Stock: A Buffett-Approved Value Play

In the world of investing, few names carry as much weight as Warren Buffett. The oracle of Omaha has built a legendary career by identifying undervalued stocks and holding them for the long term. One stock that fits this description is nvidia (NVDA), the graphics processing unit (GPU) powerhouse that has been on a tear in recent years. Let's explore how Nvidia aligns with Buffett's principles and why it's a clear case study of an indispensable investing principle from the master himself.



Nvidia's growth trajectory is a testament to Buffett's principle that growth is always a component in the calculation of value. From fiscal 2014 to fiscal 2024, Nvidia's revenue grew at a compound annual growth rate (CAGR) of 31%, while its earnings per share (EPS) rose at a CAGR of 50%. This impressive growth was driven by the rapid expansion of its data center business, which sells high-end GPUs for machine learning and artificial intelligence (AI) tasks, and its steady sales of gaming GPUs, which could also be used to mine certain cryptocurrencies. Additionally, Nvidia expanded its automotive chip business and ramped up its shipments of Tegra system-on-chips (SoCs) for other devices. This growth trajectory demonstrates that Nvidia's value is not only based on its past performance but also on its future growth prospects.

In early 2023, Nvidia's stock traded at a seemingly expensive price-to-earnings (P/E) ratio of 62, which would have scared away most traditional value investors. However, with the benefit of hindsight, it's clear that Nvidia stock was a superb value stock at the time. On Feb. 26, 2025, Nvidia reported completed financial results for fiscal 2025 (ended Jan. 26). For this past year, the company generated EPS of $2.94. Going back to the beginning of 2023, Nvidia's $14.50 share price (split adjusted) at the time meant it was valued at less than 5 times the fiscal 2025 earnings it just reported. This valuation was much lower than the P/E ratio of 62 in early 2023, indicating that many value investors would likely have turned up their noses at Nvidia stock due to its premium valuation.

However, those who considered future growth prospects fared better. On a split-adjusted basis, the company generated EPS of just $0.17 in fiscal 2023. Its profits have jumped 17 times in just two years. Investors who factored a strong outlook for Nvidia into their decision-making process were more likely to see the attractive value proposition in Nvidia stock. This is because, as Warren Buffett explained in his 1992 shareholder letter, "Growth is always a component in the calculation of value." By considering future growth prospects, investors were able to recognize the true value of Nvidia stock in early 2023.

In fact, shares of the company are up over 700% since the beginning of 2023, further validating the importance of considering future growth prospects when evaluating stocks.

To apply Buffett's approach to evaluating future earnings prospects and valuation when considering high-growth stocks like Nvidia, investors should follow these steps:

1. Estimate future earnings: Buffett emphasizes the importance of estimating a company's future earnings to determine its intrinsic value. In the case of Nvidia, investors should consider the company's growth prospects in AI, data center, and gaming segments. For instance, Nvidia's revenue grew at a CAGR of 31% and EPS at a CAGR of 50% from fiscal 2014 to fiscal 2024. By analyzing the company's financial statements and understanding its business model, investors can make reasonable estimates about Nvidia's future earnings.
2. Consider the company's growth rate: Buffett acknowledges that growth is a crucial component in the calculation of value. When evaluating high-growth stocks like Nvidia, investors should consider the company's growth rate and its potential to maintain that growth in the future. For example, Nvidia's impressive growth in the data center and gaming segments has driven its stock price higher, and investors should consider whether this growth is sustainable.
3. Evaluate the stock's valuation: Buffett only buys stocks that sell at a reasonable price relative to his estimated earnings for at least five years in the future. In the case of Nvidia, investors should consider the company's valuation metrics, such as the price-to-earnings (P/E) ratio, price-to-sales (P/S) ratio, and enterprise value (EV)/Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) ratio. For instance, Nvidia's P/E ratio was over 84 times forward earnings, and its P/S ratio was over 35 times sales, which might be considered expensive by some investors. However, Buffett would argue that if Nvidia's growth prospects are strong, a higher valuation might be justified.
4. Stay within a "circle of competence": Buffett encourages investors to stay within a "circle of competence" when evaluating stocks. This means that investors should only invest in companies they understand well. In the case of Nvidia, investors should have a solid understanding of the company's business model, competitive advantages, and growth prospects before making an investment decision.
5. Be patient and disciplined: Buffett is known for his patience and discipline when it comes to investing. When evaluating high-growth stocks like Nvidia, investors should be patient and disciplined, waiting for the right opportunity to buy the stock at a reasonable price. They should also be prepared to hold the stock for the long term, as Buffett often does, to allow the company's growth prospects to play out.

By following these steps and adhering to Buffett's principles, investors can make more informed decisions when considering high-growth stocks like Nvidia. However, it's essential to remember that Buffett's approach might not be suitable for all investors, and individual risk tolerance and investment goals should be taken into account.

In conclusion, Nvidia stock is a clear case study of an indispensable investing principle from Warren Buffett. By considering future growth prospects and evaluating the stock's valuation, investors can recognize the true value of high-growth stocks like Nvidia. By following Buffett's approach, investors can make more informed decisions and potentially reap significant rewards in the long term.