Nvidia Stock Is Doing Something It's Only Done Twice Before in the Past 4 Years. History Says This Will Happen Next.

Nvidia (NASDAQ: NVDA) stock has been one of the market's best performers in recent times, even posting the biggest gain last year in the Dow Jones Industrial Average with a 171% increase. What's the reason for this momentum? The company has built tremendous leadership in what may be today's highest-growth and highest-potential market: artificial intelligence (AI).

Today's $200 billion AI market is forecast to reach more than $1 trillion by the end of the decade, and AI holds the potential to transform many industries and our daily lives. All of this could generate significant revenue growth for companies in the space. Nvidia's earnings already are benefiting, since the company sells the products and services -- from chips to software -- needed to develop AI and apply it.

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As a result, the tech-giant's revenue has advanced in the double-digits and triple-digits, quarter after quarter, reaching records well into the billions of dollars. The stock price, as mentioned, has followed.

But recently, the stock has retreated from its highs and has done something it's only done twice before in the past four years. A look at history shows us what's likely to happen next.

Image source: Getty Images.

Training and inferencing

First, here's a quick summary of Nvidia's story so far. The tech player is the designer of the world's top-performing graphics processing units (GPUs), or high-powered chips critical for AI tasks like the training and inferencing of models. In Nvidia's earlier days, it sold GPUs mainly to the video gaming market, but as it became clear these chips could play a key role in other industries, Nvidia expanded into these areas.

On top of this, Nvidia built an entire ecosystem of related products and services to become the one-stop shop for any customer creating an AI program. Today, Nvidia serves the world's biggest technology companies -- from Meta Platforms to Microsoft -- and is at the center of key AI projects. For example, when OpenAI and the U.S. government recently announced a new $500 billion AI infrastructure project, they named Nvidia as a key technology partner.

As mentioned, Nvidia's AI strengths have driven gains in the stock and lifted its valuation so that the stock has traded as high as more than 75x forward earnings estimates within the past four years. As analysts' earnings forecasts have climbed, the stock's valuation has come down somewhat, and it generally has traded for about 48x forward earnings estimates over the past six months.

Nvidia's valuation

Let's consider the move Nvidia stock has made in recent weeks. The stock has declined and fallen below the valuation of 30x forward earnings estimates. It's only dropped below that level during two other periods over the past four years -- once about a year ago, and the other time in the spring of 2023. History shows that when that happened in the past, the stock then went on to soar in the months to follow.

NVDA Price-to-Earnings Ratio (Forward) data by YCharts.

If history is an accurate guide, patterns suggest that Nvidia stock, after the recent dip and decline in valuation, should soon roar higher. Of course, it's important to keep in mind that investors can't always rely on history for guidance. Stocks and the market, in general, have been known to surprise investors.

This is why it's key to consider a company's earnings track record and long-term prospects before making any investment decision. With that in mind, there's reason to be confident about Nvidia. Above, I spoke of the company's solid offering of AI products and services and impressive revenue. This revenue also comes with high profitability on sales, with gross margin consistently surpassing 70%.

Nvidia has pledged to update its GPUs on an annual basis. It's now launching its Blackwell architecture, and this innovation will make it difficult for rivals to take significant market share.

History suggests that Nvidia stock, after its recent pause and drop in valuation, is ripe for a rally -- and that may indeed happen. But what really makes Nvidia a buy is the company's financial strength, market position, and focus on innovation -- three elements that should deliver growth and stock performance over the long haul.

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.