Key Points

Historical patterns show that heavy investments in emerging technologies frequently lead to significant market corrections.
Nvidia's modest valuation may already reflect the possibility of such corrections.
10 stocks we like better than Nvidia ›

The present condition of Nvidia's shares (NASDAQ: NVDA) appears puzzling at first glance. Even after posting 85% annual revenue expansion in its most recent quarter, the shares trade at just 32 times earnings, matching the S&P 500's typical price-to-earnings multiple.

Part of the explanation could lie in the nearly 1,700% advance since late 2022, or the growth constraints implied by its $5.1 trillion market value under the law of large numbers. Yet another factor may be the extraordinary level of AI-related outlays and the long record of such investment surges concluding poorly.

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Investors cannot be certain that echoes of earlier cycles are limiting the chipmaker's current momentum. Even if that connection holds, should it influence decisions? A closer examination follows.

Image source: Nvidia.

Historical precedent and Nvidia

This pattern from the past deserves attention. Seasoned market participants recall how the internet investment surge of the late 1990s and early 2000s preceded the dot-com collapse. Further back, the automobile investment wave of the 1920s preceded the Great Depression.

Big tech's AI commitments echo those earlier episodes. Major cloud providers have committed $725 billion to capital projects. A substantial share has flowed to Nvidia components, helping the firm report $81.6 billion in revenue for the first quarter of fiscal 2027 (ended April 26).

Analysts project an 82% revenue jump for fiscal 2027, followed by a slowdown to 41% growth in fiscal 2028.

One must expect the AI expansion to moderate eventually, and the projected deceleration could foreshadow further easing in subsequent periods.

Still, Nvidia's enormous scale may account for part of the slowdown, since larger bases make high-percentage gains harder to sustain.

In addition, Nvidia's forward valuation of 24 appears attractive, and the forward one-year P/E of 17 would look reasonable even during an AI slowdown. Therefore, any pullback tied to slower growth would probably prove temporary.

Should investors stay with Nvidia?

Given its growth trajectory and valuation, investors need not fear that history will derail the Nvidia case.

Based on prior boom-and-bust cycles, investors should anticipate that the AI expansion will eventually peak and position portfolios accordingly.

Even so, Nvidia's current profile appears to shield the shares from lasting damage. Slower growth after fiscal 2027 is likely, yet revenue expansion should stay solid for the foreseeable horizon.

Furthermore, Nvidia's forward multiples are already low enough to incorporate a meaningful slowdown. While a short-term retreat and more modest price gains than in recent years remain possible, Nvidia should hold up even if past technology cycles suggest later challenges.

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Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.