Nvidia Corp. is the most expensive stock in the S&P 500, trading at about 23 times the company’s projected sales over the next 12 months.
But there is a problem with this assessment. In the AI boom, no one can figure out what the chipmaker’s earnings will actually be—not the Wall Street analysts who cover Nvidia, not the Nvidia executives themselves. So how should investors calculate whether a stock is expensive or not?
For more than a year, the surge in demand for Nvidia chips fueled by the artificial intelligence frenzy has made a mockery of Wall Street’s quarterly financial estimates. Analysts don’t make up numbers, they listen to signals from management, just like in any other company. However, even Nvidia management is struggling to predict how much money the chipmaker will make in three months.
Since Nvidia’s sales began to soar in the fiscal quarter ending April 2023, revenue has exceeded the midpoint of the company’s own forecast by an average of 13%, more than double the average over the past decade. When Nvidia reported results in August, sales beat forecasts by 23%, the most since at least 2013, according to data compiled by Bloomberg.
An Nvidia representative declined to comment.
Estimated sales
According to Morningstar analyst Brian Colello, who last month raised his price target on the stock to $105 from $91. They are currently trading at around $127.
Assuming a sustained improvement in Nvidia’s ability to increase shipments, Colello said he is adding up to $4 billion to Nvidia’s quarterly revenue to push sales into the coming quarter.
“I’m not the first analyst to raise the price target or fair value or be surprised that earnings are so much ahead of what we thought a year ago,” Colello said. “It was interesting and rewarding, but definitely challenging.”
Colello isn’t the only one raising his valuation. On Friday, Melius analyst Ben Reitses raised his price target for Nvidia for the fifth time this year to $160 from $125, implying a 26% gain from Friday’s closing price.
Of course, there are plenty of traders buying Nvidia purely based on momentum. Nvidia shares are up 156% this year and overtook Microsoft Corp. on Tuesday. and briefly became the market leader. most valuable company in the world at $3.34 trillion. This rally helped invest a record $8.7 billion in technology funds last week through June 19, according to Bank of America Corp.’s analysis of EPFR Global data. Nvidia shares have since fallen 6.7%. erasing over $200 billion in market value.
For investors prone to looking at discounted cash flow models that have greater volatility than in the past, the gap between estimates and actual results has created a conundrum.
Over the past five quarters, Nvidia analysts’ sales estimates have deviated by an average of 12% from actual results, according to Bloomberg. It ranks third among S&P 500 companies that posted average quarterly revenue of at least $5 billion over the past five quarters and have at least 20 analysts covering them.
What price?
With Nvidia’s business booming and its biggest customers like Microsoft promising to spend even more on computer hardware in the coming quarters, the big question for investors is what’s a reasonable price to pay for a stock whose earnings and sales growth are far outpacing its peers. mega-capitalization.
At current estimates, Nvidia is projected to make a profit of $14.7 billion on sales of $28.4 billion in the current quarter, up 137% and 111%, respectively, from the same period a year ago. Meanwhile, Microsoft’s sales are expected to grow 15%, while Apple forecasts growth of about 3%.
While Nvidia’s valuation multiples are high, they look more reasonable given Nvidia’s growth, especially as valuations continue to remain low. The bigger concern, according to Michael O’Rourke, chief market strategist at Jonestrading, is that the extent to which Nvidia is beating Wall Street’s growth expectations will soon begin to decline, simply due to the company’s sheer size. This can make it difficult to justify the share price.
“That’s where the risk comes in,” O’Rourke said. “You’re paying a high price for a large market cap company whose performance is trending downward and is likely to continue to decline.”