Nvidia Corp.'s Underwhelming Earnings Report boosted stocks and reassured the market that the artificial intelligence craze is still going strong. It could also make the stock look cheaper.
All eyes were on the chipmaker's guidance for clues about the strength of the AI market and Nvidia didn't disappoint us. Now that the numbers are in, bulls are quickly calculating the stock's new price-to-earnings ratio, or how much investors are paying for future growth.
“Some investors were afraid to buy because they thought the stock was too expensive, but that was a big mistake,” said James Demmert, chief investment officer at Main Street Research. “Every time there is news, the P/E ratio goes down because the E ends up being a lot stronger than people expect.”
In other words, Nvidia's profits have grown even faster than the stock.
Due to massive earnings growth, Nvidia has seen its valuation decline since mid-2023, even amid a record-breaking stock rally. In the fiscal fourth quarter, the chipmaker reported a whopping 486% year-over-year growth in earnings per share (excluding certain items), with $5.16 of $5.16 comfortably beating analyst estimates of $4.60. The forecast for sales of around $24 billion in the first quarter also exceeded expectations.
The numbers suggest that Wall Street's estimates are likely to be revised upwards, which will likely lower the valuation again if the stock price fails to keep up. The stock rose 13% in premarket US trading.
While some investors were concerned about a Possible bubble Others noted that Nvidia is still cheaper than its competitors. The stock was trading at about 30 times expected earnings relative to its peer as of Wednesday's close modern micro devices Inc. by 43 times. The shares are also cheaper than those of Amazon.com Inc. and Microsoft Corp., while the Nasdaq The 100 index trades at a 25x multiple.
“Nvidia continues to be one of the cheapest AI-focused stocks after rising year-to-date,” said David Wagner, portfolio manager at Aptus Capital Advisors LLC.
Optimistic comments from Nvidia CEO Jensen Huang are also likely to improve sentiment on longer-term valuation. He said AI has “reached the tipping point” and demand is surging across all industries worldwide.
“The longer the growth cycle, the more attractive the valuation appears to growth investors,” said Hendi Susanto, portfolio manager at Gabelli Funds. “We want to see whether Nvidia will continue to deliver such strong growth beyond 2024, 2025 and even 2026.”
However, according to Alec Young, chief investment strategist at Mapsignals, Nvidia's valuation must take into account the idea that its current exponential growth cannot last forever.
“The normal valuation reflects the fact that the market does not believe this type of growth is sustainable,” he said. “Once you get that big, the market doesn’t expect you to keep growing and doubling your business every year.”
But that doesn't mean there's a lack of enthusiasm for the stock and its growth trajectory over the next few years, especially given its trajectory space in the larger marketsaid Young.
“AI is a huge opportunity globally and Nvidia is the arms dealer,” he said.