Why I'm Still Holding Nvidia (NVDA) Stock Despite Its Sky-High P/E Ratio

Despite its sky-high price-to-earnings ratio, the author is still holding Nvidia (NVDA) stock because the company's growth rate is exceptional. The semiconductor giant has seen an impressive annual gain of 63% over the past decade, and a $10,000 investment made 15 years ago would now be worth $7.5 million with reinvested dividends or $6.9 million without. The author has been a shareholder for only a year or two and intends to hold onto the stock for the long term.

Nvidia has successfully transitioned from gaming chips to focusing on AI, which is a rapidly growing industry. The company boasts a dominant AI ecosystem, offers financing for AI infrastructure to smaller companies, and expands its product offerings with custom AI processors and partnerships. Nvidia reported a remarkable second quarter, with revenue up 106% year-over-year to $96 billion, and data center revenue up 117% to $89 billion.

The company's market capitalization is $5.5 trillion, and it has acquired AI specialist Hugging Face for $12.9 billion. Nvidia CEO Jensen Huang assures that AI has reached its inflection point and is now producing profitable work. The stock's price-to-sales ratio of 17 is high, but this is not uncommon for a fast-growing technology company. Moreover, Nvidia's forward-looking price-to-earnings ratio of 24 is well below its five-year average of 35, and its price-to-cash flow ratio of 29 is below its five-year average of 51.

Nvidia is also buying back some of its shares, buying $26 billion worth in the latest quarter, which indicates that management sees the stock as undervalued. Additionally, the company recently increased its dividend payout by 25 times, giving it a dividend yield of 0.49%. While the author acknowledges that Nvidia has risks, they believe that even in a market downturn, the stock would likely recover and reach new highs.