If you read what I wrote yesterday, you will know that I was delighted by Nvidia’s (NVDA) earnings released after the market close, and not just because I own the stock. It was because in the days leading up to the release, as NVDA lost around 8%, there were rumblings about some kind of conspiracy or insider knowledge that was prompting the selling. As it turned out, Nvidia delivered a blowout quarter once again, and once again they also issued an upbeat outlook. These results have consigned those conspiracy theories to where they belong, the trash can of history.
Based on what we have seen before though, I suppose that those looking to garner cynical attention around NVDA will go back to saying that it is overhyped and overvalued, that NVDA stock will come crashing back to Earth at some point. But when those commentators make such remarks, they will be wrong then too. Nvidia’s success has not been about hype at all, but about actual commercial success and growth that is just beyond most people’s imagination, and there is no sign of that slowing down.
It is understandable, to some degree, to look at a stock that has gained over 200% in a year and say that it must be overbought, but the numbers indicate that NVDA has actually not kept pace with the company’s rapid earnings growth and, if anything, it is still cheap at current prices. This recent report showed that earnings, when compared to the same quarter a year ago, grew by 769%, on revenue that increased by 265%. Not only is Nvidia growing sales at a stunning rate, but they are also making boatloads of money along the way and, based on that growth, a 200% increase in the stock’s price over a year is not even close to reflecting reality.
Nor is NVDA that expensive when you look at conventional value metrics, at least when you compare it to other tech firms during similar periods of rapid growth. Amazon (AMZN), for example had a trailing P/E of over 1,000 in 2013, and that number was around 250 as late as 2017, by which time the company had turned the profit tap on and was starting to show rapid growth in EPS. What is now Meta Platforms (META) also had quadruple digit P/Es back in 2013, and there was no shortage of pundits telling you that P/Es that high were ridiculous in those and many other cases.
However, both AMZN and META have shown exponential gains in their stock price since they were trading at those “crazy” P/Es, so why can’t NVDA do the same off of a trailing P/E of just below 90? It can and, barring any global crisis or a massive shift in the U.S. economy resulting from a policy mistake, probably will.
The thing is, the rise in NVDA over the last few years has not been anticipatory or speculative. It has been the market attempting to keep pace with the rapid growth that came as the company transformed itself from a successful but uninspiring maker of video chips and graphics cards, to the world’s leader in producing AI capable hardware. That transformation has come just as it seems that every product made, from actual computers to food processors and vacuum cleaners, want to claim that they are “enhanced by AI capability.”
Right now, the term "AI" is the “gluten-free” of the tech world. Everybody feels compelled to point out that their product offers that benefit, even if it always has, or at least has for a while, and even if the difference it makes is only marginal. This marketing frenzy will presumably die down and be replaced by another catch-phrase at some point, because fads always come and go. But even when the hype around the concept of AI fades, the demand for hardware to power programs that can learn from data and that can essentially write their own code will stay strong.
We may all be a bit sick of hearing the letters "AI," but it really is a disruptive leap in how we as a society perceive and use computers. It isn’t going away and still has lots of growth ahead, and Nvidia is still the number one supplier of things that are essential to making that leap. So, if you hear over the next few weeks that NVDA is overbought or overhyped, know that those statements have as much validity as those who said that the pre-earnings drop in the stock was evidence of a conspiracy or a fix -- which is to say, none at all.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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