NVIDIA Corp. has emerged as the most expensive stock in the S&P 500 Index, trading at approximately 23 times its projected sales for the upcoming year. This valuation, propelled by the current artificial intelligence (AI) boom, poses significant uncertainties for both analysts and investors alike.
The demand for NVIDIA’s chips, driven by the AI frenzy, has consistently outpaced Wall Street’s quarterly estimates over the past year. Despite efforts from analysts to base projections on NVIDIA’s management guidance, the company itself faces challenges in accurately forecasting revenues, especially in a dynamic market where quarterly revenues have frequently exceeded forecasts by significant margins.
In the fiscal quarter ending April 2023, NVIDIA’s revenue surpassed expectations by an impressive average of 13 percent, marking a substantial increase compared to historical averages. August saw an even more remarkable performance, with sales exceeding projections by 23 percent, the highest margin since at least 2013 according to Bloomberg data.
Brian Colello, an analyst at Morningstar, emphasizes the pivotal role of supply uncertainties amidst soaring demand. This unique challenge complicates revenue modeling for NVIDIA, prompting analysts like Colello to repeatedly revise their price targets. For instance, Colello recently raised his price target from $91 to $105, reflecting his adjusted revenue expectations.
Market sentiment continues to favor NVIDIA, evident from the stock’s 156 percent surge this year alone. At one point, NVIDIA briefly surpassed Microsoft Corp. to become the world’s most valuable company, reaching a market cap of $3.34 trillion. This momentum-driven rally resulted in a record $8.7 billion inflow into tech funds in a single week, as reported by Bank of America Corp.’s analysis of EPFR Global data. However, a subsequent decline of 6.7 percent erased over $200 billion in market value, highlighting the volatility inherent in NVIDIA’s stock amidst its meteoric rise.
Despite the discrepancies between analysts’ estimates and actual results, which have averaged a 12 percent deviation over the past five quarters, investors remain captivated by NVIDIA’s robust sales and profit growth. The company is projected to achieve a profit of $14.7 billion on sales totaling $28.4 billion in the current quarter, marking impressive year-over-year increases of 137 percent and 111 percent, respectively.
Yet, as NVIDIA’s growth trajectory stabilizes with its size, analysts caution about the sustainability of such high valuation multiples. Michael O’Rourke, chief market strategist at Jones Trading, warns that as NVIDIA matures, exceeding Wall Street’s expectations by wide margins may become increasingly challenging, potentially affecting the stock’s premium valuation.
In conclusion, while NVIDIA’s current valuation multiples may seem elevated, they appear more justifiable given the company’s exceptional growth in a burgeoning sector. Nevertheless, ongoing uncertainties surrounding revenue forecasting and market volatility suggest that caution is warranted, especially as NVIDIA navigates the complexities of sustaining its growth momentum amidst evolving market conditions.
