Nvidia (NASDAQ: NVDA) beat earning forecasts on Wednesday (22 May), and the shares quickly climbed 7% when the market opened Thursday.
Sales hit $26bn for the three months to 30 April, ahead of the analysts’ target of £24.6bn.
Earnings per share (EPS) also beat estimates, of $5.60, coming in at $6.12.
AI surge
Revenue is up 268%, with profits multiplied more than sixfold compared to the same quarter in 2023. Artificial Intelligence (AI) is largely behind the growth frenzy, with revenue from the firm’s datacenter division up more than 400%.
Nvdia announced a 10-for-1 stock split too. It won’t change the valuation of the company, but it should make investing in the stock a bit easier for small investors.
We can only buy or sell in whole numbers. And with the share price already over $1,000 before the split, there’s not a lot of flexibility.
Soaring valuation
Nvidia stock has rocketed by 2,500% in the past five years. But I find it hard to get my head round some of the numbers we’re seeing here.
It has a market cap of over $2.3trn. Yes, trillion dollars. That’s got 12 noughts on it. Still too boggling on the mind? Try this…
Its market cap is about the same as the expected GDP of Italy in 2024. It would take the entire value of all the goods and services sold in the EU’s third-largest economy to buy out Nvidia.
And Nvidia is still only the third-biggest company in the US. It makes Britain’s AstraZeneca, with a market cap measured only in the billions, look like a penny stock.
Forecasts
Even after this staggering rise, analysts still expect EPS at Nvidia to treble between 2024 and 2027.
The valuation must be sky high, surely? Well, we’re looking at a forecast price-to-earnings (P/E) ratio of over 40 for the 2024-25 year.
But that’s a long way from the multiple of nearly 120 reached in 2023. And those earnings growth forecasts could drop the P/E as low as 26 by 2027. That might not look too steep at all, not even by UK growth stock standards.
What risks?
Does this sound too good to be true?
I do see plenty of risk here. One is that there’s a huge amount of emerging competition in the AI market. As billionaire investor Warren Buffett famously pointed out, the pioneers in aviation technology weren’t the ones who made all the money.
Some big investors are already looking elsewhere for AI growth. Cathie Wood, for example, has been selling off Nvidia, and is investing in smaller stocks like UiPath.
Gamble for gain?
So yes, I do think it could be a bit of a gamble to buy Nvidia now, with so much gain already behind us.
But then again, if those forecasts come true, and we do see the P/E fall as low as 26… I am tempted, perhaps with just a small amount of money. After all, I’ll only need $102 to get in now!
