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Investors are divided over Nvidia’s valuation as the chipmaker’s remarkable 220% rally slows down. While some, including Alec Young, Chief Investment Strategist at Mapsignals, consider Nvidia to be “very cheap,” pointing to a price-to-earnings ratio lower than the estimated growth rate, others express concerns about the stock’s high cyclical nature. The debate centers on Nvidia’s current position, having tripled in less than a year, with its valuation influenced by yet-to-be-realized profits. Notably, Ark Investment Management’s Cathie Wood views Nvidia as an expensive play on artificial intelligence, while others stress its robust growth outlook.
As Nvidia experiences a slowdown in its exceptional 220% rally, the investing community finds itself divided on the chipmaker’s valuation. While some, such as Alec Young, Chief Investment Strategist at Mapsignals, assert that Nvidia is “very cheap,” emphasizing a price-to-earnings ratio lower than the estimated growth rate, others express reservations about the stock’s high cyclical nature. The ongoing debate reflects Nvidia’s current position, having tripled in less than a year, with its valuation influenced by profits that have yet to materialize.
Young argues that Nvidia’s current stock price is remarkably affordable, an uncommon occurrence considering its price-to-earnings ratio is below the company’s estimated growth rate. Michael Sansoterra, Chief Investment Officer at Silvant Capital Management, echoes this sentiment, deeming Nvidia “relatively inexpensive” and emphasizing its substantial growth compared to most other companies.
However, it’s crucial to note that Nvidia’s valuation is grounded in anticipated profits in an industry acknowledged for its cyclical nature. On a trailing basis, Nvidia is priced at around 35 times sales, making it the most expensive stock in the S&P 500. Such a valuation is notably higher than its closest counterpart, Cadence Design, and significantly exceeds the benchmark average.
Cathie Wood, Founder of Ark Investment Management, previously labeled Nvidia as an expensive and obvious choice for participating in the artificial intelligence trade. Wood’s firm has sold Nvidia shares in recent months. Similarly, Robert Arnott, Founder of Research Affiliates LLC, sees Nvidia as a potential bubble, characterized by being “priced beyond perfection.”
Nvidia’s upcoming earnings report on Nov. 21 adds anticipation to the ongoing evaluation debate. Investors will closely monitor the company’s stance on China, where the US has imposed tighter restrictions on the sale of advanced semiconductors. Recent reports about Nvidia planning to release three new artificial intelligence chips in China have slightly boosted the chipmaker’s shares.
David Klink, Senior Equity Analyst at Huntington Private Bank, acknowledges Nvidia’s robust growth outlook but highlights the potential risks associated with any signs of a slowdown. Maintaining the current rapid growth is essential to sustaining what seems like a bargain valuation, according to Klink.
In the broader tech landscape, the profit outlook for Big Tech remains a key factor in outperforming small caps. Earnings data compiled by Bloomberg show that the tech sector, along with consumer discretionary, has been among the biggest winners in the current earnings season. Analysts’ 12-month profit estimates for the tech-heavy Nasdaq 100 relative to the small-cap Russell 2000 are at a record high.
The article also touches on other notable developments in the tech industry, including Microsoft restoring access to OpenAI’s ChatGPT chatbot, Trade Desk Inc.’s significant stock decline due to a weak revenue forecast, Walt Disney Co.’s film release schedule overhaul, and updates from Taiwan Semiconductor Manufacturing Co. and Semiconductor Manufacturing International Corp. regarding the global chip market.
