Nvidia valuation drops despite rally as earnings estimates outpace share price

Nvidia Corp’s impressive stock rally in recent days has seen the chip developer’s valuation decrease, as measured by the forward price/earnings (P/E) ratio. Over the last three sessions, the company’s stock has risen more than 31%, with a 3% gain reaching $401.11. Despite this, Nvidia’s P/E multiple has fallen due to Wall Street’s earnings expectations for the company rising even faster than its share price.

The consensus expectation for Nvidia’s second-quarter earnings per share has increased to $2.05, with analysts raising their targets by an average of 95%. Full-year earnings per share estimates have also been raised by 71% to $7.75. This follows Nvidia’s forecast of current quarter revenue being more than 50% above Wall Street estimates, with CEO Jensen Huang stating the company is “significantly increasing our supply to meet surging demand” for data centre chips.

As analysts raise their price targets, there is still debate over whether the company can live up to the hype. Bernstein analyst Stacy Rasgon said, “Investors are waiting to see if the current strength this year is indicative of a new trajectory.” He added that the high valuation before the quarterly report reflected bets that estimates were too low and that “we’ll see if that happens again.”

Susannah Streeter, head of money and markets at Hargreaves Lansdown, warned that investors should be cautious of potential issues such as supply chain pressure, which could bring price volatility. She said, “Nvidia has a front seat on the AI juggernaut and the step change in growth is unlikely to be short-lived, but hyper-growth of this scale will also bring challenges.”

During Tuesday’s session, Nvidia became the first chipmaker to boast a $1 trillion valuation. It ended the session with a market cap of about $991 billion, remaining more richly valued than rivals including Advanced Micro Devices, which has a forward P/E of about 38. Nvidia is also the biggest year-to-date percentage gainer in the S&P 500, up almost 175% compared with the S&P 500’s almost 10% gain and an almost 119% gain for Meta Platforms, the next biggest gainer in the benchmark.

Artificial intelligence (AI) has been a dominant theme for companies reporting quarterly earnings in recent weeks. AI was mentioned 86 times on Nvidia’s conference call, outpacing 52 mentions on Alphabet’s call and 35 mentions on Microsoft’s call, reports Channel News Asia.