Ever since Nvidia (Nasdaq: NVDA) saw a meteoric stock price run, its market valuation has been closing in on a mind-boggling $1 trillion.
Its valuation has tripled in 2023 and is up tenfold from the start of 2019.
Currently, there are only five publicly traded companies with trillion-dollar valuations. Those are Apple (Nasdaq: AAPL), Microsoft (Nasdaq: MSFT), Saudi Aramco (Tadawul: 2222), Alphabet (Nasdaq: GOOGL) and Amazon (Nasdaq: AMZN).
That is quite a group that Nvidia is about to join.
The move that Nvidia’s stock made on May 24 alone was staggering. I don’t know that I’ve ever seen a company with a $750 billion market valuation go up 25% in a single trading session.
What drove that big jump in the stock price was Nvidia forecasting quarterly revenue at a level that was 50% higher than analyst estimates.
It seems that demand for Nvidia’s artificial intelligence (AI) chips is currently nearly unlimited.
Against what the company earned last year, Nvidia now sports a price-to-earnings (P/E) ratio of over 200!
The consensus analyst earnings estimate for this year is $7.75 per share. That means Nvidia sports a frothy forward P/E ratio of 51.
This reminds me of when shares of Intel (Nasdaq: INTC) were all the rage back at the turn of the century.
Just as Nvidia is the hot stock linked to the hot topic of AI today, Intel was the hot stock linked to the hot topic of the internet back then.
Already a big company, Intel saw its valuation soar to nearly half a trillion dollars in 2000. That was a massive valuation two decades ago.
And at that valuation, Intel was trading for over 60 times trailing earnings – so it wasn’t even as extremely valued as Nvidia is today.
You won’t be surprised to learn that at 60 times earnings and with the company’s half-a-trillion-dollar valuation, Intel’s stock was a terrible buy.
The price for Intel then was $75. The price for Intel now – about 23 years later – is only $30.
I think investors jumping on Nvidia today will likely have a similar experience going forward.
The valuation of Nvidia is simply too large for investors to earn a decent return from buying shares at this point.
I’m sure Nvidia is going to make tons of money going forward, but even with significant earnings growth, it is going to take years to justify the current valuation of nearly $1 trillion.
The company is great. The valuation isn’t.
The Value Meter rates Nvidia as “Extremely Overvalued.”
— Jody Chudley
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Source: Wealthy Retirement