Nvidia’s Profits Surging Despite Stock Market Concerns About a Bubble
Nvidia Corp.’s impressive earnings report boosted stock prices and reaffirmed the market’s enthusiasm for artificial intelligence. This could also create the perception that the stock is more affordable.
All eyes were on the chipmaker’s guidance for signs of strength in the AI market, and Nvidia did not disappoint. With the figures obtained now, the bulls quickly calculate the stock’s new price-to-earnings ratio, or how much investors will pay for future growth.
“Some investors have been afraid to buy because they think stocks are too expensive, but that’s been a huge mistake,” said James Demmert, chief investment officer at Main Street Research. “Every time it reports, the P/E shrinks because the E ends up being so much stronger than people expect.”
In other words, Nvidia’s earnings have grown even faster than the stock.
Nvidia’s valuation has been falling since mid-2023, even amid a record-breaking stock rally due to its massive earnings growth. In its most recent fiscal year, the chipmaker reported a whopping 486 percent year-over-year growth in earnings per share excluding certain items, and the $5.16 figure beat analysts’ estimates of $4.60. Its forecast for first-quarter revenue of about $24 billion was also a big win.
The numbers mean Wall Street estimates will be revised higher, which is likely to lower the valuation again if the stock price doesn’t keep pace. The stock jumped as much as 14% at the market open and hit an intraday record high.
While some investors have been concerned about a potential bubble around AI-related stocks, others pointed out that Nvidia remains cheaper than the rest. The stock trades at approximately 32 times forward earnings, while competitor Advanced Micro Devices Inc. trades at 45 times. Shares are also cheaper than those of Amazon.com Inc. and Microsoft Corp., while trading at a multiple of 25 times the Nasdaq 100 index.
“Nvidia remains one of the cheapest AI-oriented stocks even after years,” said David Wagner, portfolio manager at Aptus Capital Advisors LLC.
Bullish comments from Nvidia CEO Jensen Huang are also likely to boost sentiment on long-term valuation. He said AI has reached a tipping point, and demand is growing globally across industries.
“The longer the growth cycle is, the more attractive the valuation is looking for growth investors,” said Gabelli Funds portfolio manager Hendi Susanto. “We want to see if Nvidia continues this kind of strong growth beyond 2024, into 2025 and even into 2026.”
According to Alec Young, chief investment strategist at Mapsignals, Nvidia’s valuation must be based on the idea that the current exponential growth cannot last forever.
“The normal valuation reflects that the market does not see this kind of growth as sustainable,” he said. “When you get this big, the market doesn’t expect you to grow and double your business every year.”
But that doesn’t mean there won’t be a lack of excitement about the stock and its growth prospects in the coming years, especially given its place in the larger market, according to Young.
“Artificial intelligence is a huge opportunity globally, and Nvidia is an arms dealer,” he said.
