Nvidia's Valuation Just Hit Lows Not Seen Since 2019, Even as Its Profits Doubled

Nvidia is likely one of the most closely watched stocks on the market. The company's graphics processing units (GPUs) were crucial in the advent of generative artificial intelligence (AI) in late 2022, and the chipmaker has become a bellwether for the AI landscape. All eyes were on Nvidia as the company released its quarterly financial report after the market close on Wednesday.

Investors were hoping for insight into the state of AI adoption and whether AI had room to run, and that question was answered with a resounding "yes."

There's no denying the results

One of the biggest questions among investors is just how long Nvidia could keep up its frantic pace of growth. It turns out there's still runway ahead, as its growth continued to accelerate. For its fiscal 2027 second quarter (ended July 26), the company generated record revenue of $96.2 billion, up 106% year over year and 18% quarter over quarter. This drove adjusted earnings per share (EPS) up 120% to $2.22. The results were partially driven by Nvidia's expanding gross margin of 75%.

For context, analysts' consensus estimates called for revenue of $92.3 billion and adjusted EPS of $2.09, so Nvidia surpassed expectations with ease.

The data center segment, which includes processors used for AI, cloud computing, high-performance computing, and (as the name implies) data centers, delivered another record-setting performance. Segment revenue surged 117% year over year and 18% sequentially to $89 billion. Nvidia reminded investors that the results included no product shipments to China.

The gaming segment was recently rebranded as the "Edge Computing" segment and now includes PCs, workstations, game consoles, robotics, and automotive. The segment also generated solid results, with edge computing revenue climbing 27% year over year and 13% sequentially to $7.2 billion.

CEO Jensen Huang made no mistake about what was driving the company's fortunes, noting that its next-generation processors continue to see robust demand. "AI has reached its inflection point. It's doing useful work. Its tokens are productive and profitable. Now, compute is revenue. And demand is accelerating."

The death of AI has been greatly exaggerated

Management's forecast suggests Nvidia's accelerating growth will continue into the third quarter and beyond. Its Q3 outlook calls for revenue of $108 billion, representing year-over-year growth of 89%. The company also suggested that its gross margin would dip slightly to 74% at the midpoint of its guidance.

There have been concerns that the biggest names in tech were working feverishly to reduce their dependence on Nvidia's compute solutions. However, in the wake of the company's financial report, Nvidia announced (another) major collaboration with Amazon (NASDAQ:AMZN) Web Services (AWS). The expansion of the pair's existing partnership comes "across the full AI infrastructure stack -- across GPUs, CPUs, memory, models, data processing, and robotics." In all, AWS plans to deploy "more than 3 million Blackwell Ultra, Rubin, and Rubin Ultra GPUs across its global infrastructure." AWS also announced plans to "bring Vera CPUs to AWS, expanding Nvidia's role across the AWS AI stack."

When the market closed today, Nvidia's valuation hit levels not seen since early 2019, selling for less than 27 times earnings -- even as the company more than doubled its profits. That fact wasn't lost on investors, who bid up shares in after-hours trading by more than 4% (as of 6:03 p.m. ET).

The combination of blistering growth, the Amazon deal, and the stock's compelling valuation seemed enough to convince investors that Nvidia still has a long runway for growth ahead.

Danny Vena, CPA has positions in Amazon and Nvidia. The Motley Fool has positions in and recommends Amazon and Nvidia. The Motley Fool has a disclosure policy.