Is NVIDIA’s Valuation at Risk After China Bans AI Chip Purchases?

If you are holding or considering NVIDIA stock right now, you are not alone in wondering how to make sense of its wild ride. Over the last year, NVIDIA's share price has surged by 54.3% and skyrocketed more than 1,200% over the past three years. Even through recent turbulence, such as the last 7 days' dip of -1.4% and a full month’s slide of -3.9%, NVIDIA has still rewarded long-term holders handsomely with a jaw-dropping 1,346.9% return over five years. However, with every head-turning climb comes a growing debate: is now the time to buy, hold, or step back?

Some of this volatility traces back to news out of China, where regulators are tightening rules for tech companies purchasing NVIDIA’s cutting-edge AI chips. Headlines about tepid demand for NVIDIA’s new RTX6000D chip in China have stirred fresh questions about growth potential and possible shifts in risk. On the other hand, crossing the $3 trillion market cap threshold places NVIDIA in a small club of tech giants. This milestone is the kind of signal that can influence sentiment far and wide.

So, is NVIDIA’s current price justified? To help us decide, it is important to consider how the company stacks up on key valuation metrics. Right now, NVIDIA scores a 2 out of 6 on an undervaluation scale, suggesting only moderate value compared to peers. Still, there is more than one way to measure value. Let’s break down the numbers using different approaches and see if there is a smarter way to interpret what the market is telling us.

NVIDIA scores just 2/6 on our valuation checks. See what other red flags we found in the full valuation breakdown.

Approach 1: NVIDIA Discounted Cash Flow (DCF) Analysis

The Discounted Cash Flow (DCF) model is a widely used method for estimating a company's intrinsic value by projecting its future cash flows and discounting them back to today's value. This approach helps investors determine what a business is fundamentally worth, based on the cash it is expected to generate.

For NVIDIA, the latest reported Free Cash Flow stands at $72.3 billion, a staggering figure that highlights the company’s earning power. Analyst estimates suggest impressive growth in annual cash flows over the coming years, with projections rising to $249.2 billion by 2030. It is important to note that while analysts provide financial outlooks up to five years out, projections beyond 2029 are extrapolated based on trends and industry estimates rather than direct analyst forecasts.

According to the DCF model using a 2 Stage Free Cash Flow to Equity approach, NVIDIA's fair value is calculated at $144.17 per share. When compared to its current market price, this implies the stock is trading at a 21.3% premium. In other words, the market valuation is significantly higher than what the model deems reasonable today.

Result: OVERVALUED

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for NVIDIA.

Our Discounted Cash Flow (DCF) analysis suggests NVIDIA may be overvalued by 21.3%. Find undervalued stocks or create your own screener to find better value opportunities.

Approach 2: NVIDIA Price vs Earnings (PE)

When evaluating mature, profitable businesses like NVIDIA, the price-to-earnings (PE) ratio is often the go-to valuation metric. The PE ratio offers a straightforward way to see how much investors are paying for each dollar of current earnings, making it useful for comparing companies that already generate substantial profits.

A fair or “normal” PE ratio can vary widely by sector and company growth prospects. High-growth, lower-risk businesses warrant higher PE multiples, since investors are willing to pay more for future potential, while riskier or slower-growing firms often trade at a discount. For the semiconductor industry, the average PE stands at 32x, while NVIDIA’s peers average 57.4x. Right now, NVIDIA trades at 49.1x, which is well above the industry but below its direct peer group.

Simply Wall St’s proprietary “Fair Ratio” goes a step further by factoring in not just industry benchmarks, but also a company’s earnings growth, risk profile, profit margins, and market cap. This approach delivers a more tailored assessment. For NVIDIA, the Fair Ratio is calculated at 50.7x, only slightly above its current PE ratio. With this close alignment, it suggests the market’s pricing is quite reasonable given NVIDIA’s specific growth and risk profile.

Result: ABOUT RIGHT

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your NVIDIA Narrative

Earlier we mentioned that there is an even better way to understand valuation, so let’s introduce you to Narratives. In simple terms, a Narrative is your personal story or perspective on a company that ties together your assumptions about fair value, expected revenue, earnings, and margins. Narratives connect the dots between where you believe NVIDIA is today and where you think it is headed, based on both the numbers and your outlook on its business.

With Narratives, you are not just analyzing static metrics. You are linking a company’s story to your forecast and generating a custom fair value. You update your conviction as new news or events unfold. On Simply Wall St’s Community page, millions of investors use Narratives as an easy, accessible tool to capture their unique viewpoints and see how their fair value stacks up against the current price.

Narratives help you make buy, hold, or sell decisions by comparing your fair value estimate to the price on any given day. They update automatically when fresh information, such as earnings or regulatory changes, comes in. For example, some investors see NVIDIA’s fair value as high as $341, driven by optimism about AI dominance. Others set it as low as $68, reflecting concerns about competition and market risks. With Narratives, you can pinpoint where your beliefs fit and empower your investment decisions with clarity and confidence.

For NVIDIA, we will make it easy for you with previews of two leading NVIDIA Narratives:

🐂 NVIDIA Bull Case

Fair value: $341.12

Narrative view: 48.7% undervalued

Expected revenue growth: 25.46%

• NVIDIA is positioned for strong long-term growth driven by AI, data centers, and expansion into automotive and IoT markets. The company benefits from a robust ecosystem and an innovation lead.
• Key strengths include market leadership in AI hardware and software, high R&D investment, and diversified revenue streams. However, caution is warranted due to high valuation, geopolitical risks, and growing competition.
• This narrative views the elevated current valuation as justified by rapid business growth, but advises investors to focus on a long-term horizon and to actively monitor competitive and regulatory developments.

🐻 NVIDIA Bear Case

Fair value: $141.74

Narrative view: 23.1% overvalued

Expected revenue growth: 17.2%

• NVIDIA's dominance in AI hardware, data centers, and gaming positions it to capitalize on growth. However, the current share price is seen as too high relative to prospects, with future margin compression likely as competition increases.
• Key risks include escalating rivalry from AMD and Intel, potential regulatory and supply chain disruptions, and concerns that high pricing in consumer GPUs could limit upgrade demand.
• While new product innovations like Blackwell and NVLM 1.0 could boost future demand, this narrative expects data center momentum to moderate and warns that much of the AI boom optimism is already reflected in the share price.

Do you think there's more to the story for NVIDIA? Create your own Narrative to let the Community know!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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