• NVIDIA benefits from AI boom
• Market capitalization approaches one trillion US dollars
• NVDIA P/E is astronomically high
ChatGPT and other providers of applications with artificial intelligence have also caused a sensation on the stock exchange in recent weeks. After the announcement of NVIDIA’s results, it becomes clear how much the chip group is benefiting from the AI boom.
According to the German Press Agency, NVIDIA boss Jensen Huang told journalists in a conference call about “incredible orders” from data centers for the corresponding upgrade. For example, NVIDIA achieved record revenue of $4.28 billion from data center equipment in the first quarter of 2023, an increase of 14 percent. “Generative AI is driving exponential growth in compute demands and a rapid transition to NVIDIA’s accelerated computing,” NVIDIA CFO Colette Kress said at the earnings call, according to fortune.com. In the press release, the company describes almost unlimited possibilities for the expansion of AI applications. “A trillion dollars of installed global data infrastructure will transition to accelerated computing as companies race to apply AI to every product, service, and business process,” writes the NVIDIA CEO.
This has reignited the big tech rally: The day after the quarterly results were announced on May 25, 2023, NVIDIA experienced one of the largest price jumps in history, NVIDIA shares jumped around 25 percent in one day. Only the big tech companies Apple, Amazon and Microsoft have so far been able to (slightly) surpass such a price jump.
NVIDIA stock jump: Analyst skeptical about future investors
Colette Kress is forecasting the company to grow 52 percent in the second quarter, sending the stock price skyrocketing and pushing NVIDIA past the likes of Tesla in terms of market cap. Year-to-date, the share has more than doubled, up 166.5 percent, and is currently trading at $389.46. NVIDIA has thus reached a market capitalization of 961.97 billion US dollars (closing price May 26, 2023).
And within that immense market cap, which has approached $1 trillion and is catapulting it close to the big shots — Amazon, Apple, Alphabet, and Microsoft — lies the problem the paper poses for future buyers. What has proven to be a stroke of luck for owners of the shares makes it all the more difficult for new buyers: Because achieving a reasonable return at the current purchase price seems impossible.
NVIDIA’s price-to-earnings (P/E) ratio is astronomical. Even if the chip giant hits its goal of doubling earnings in the second quarter, the P/E would still be close to 80, which is exorbitantly high territory. Compared to this, Apple has a P/E ratio of 29 and Tesla a P/E ratio of 36, the latter already considered overvalued by many analysts. So, to bring P/E down to a normal level of around 20, NVIDIA would need to generate 27% annualized earnings growth, or $125 billion per year, over the next decade. Far more than the big tech companies have achieved in recent quarters.
David Trainer, founder of investment research firm New Constructs, has calculated that NVIDIA would need to grow its after-tax operating profit by 45 percent (from the current 27 percent) and revenue by 20 percent annually to make a purchase worthwhile. However, according to fortune.com, this is not perfection, but pure fantasy.
The ratings on TipRanks (Strong Buy) also show that such a jump in the price of NVIDIA shares by around 25 percent has so far been beyond imagination. The 33 analysts who have covered the stock over the past three months see the target price well below the current price. The average forecast is 313.59 US dollars, which would mean a minus of around 19 percent at the current rate (as of May 26, 2023). Meanwhile, the most optimistic price target of $400 quoted on TipRanks doesn’t seem far off.
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