Yesterday, Nvidia (NASDAQ: NVDA) stock jumped by a huge 24%. The move came on the back of the tech company’s quarterly earnings and forward guidance – which were way better than expected.
After this spike in the share price, some investors (myself included) may be thinking about taking some profits off the table. Here’s the thing though. Nvidia stock is now cheaper than it was last week.
Incredible growth from AI
Nvidia’s results for the quarter ended 30 April literally blew investors away. Revenue came in at $7.19bn versus analysts’ forecast of $6.52bn while earnings per share leapt to $1.09 versus the forecast of $0.92.
But it was the forward-looking guidance that really stole the show here.
For the current quarter, Nvidia said that, thanks to strong demand for its AI products – such as its H100 graphics processing unit (GPU) – it expects revenue of around $11bn. This was more than 50% higher than analysts’ forecast of $7.2bn.
In other words, Wall Street had this stock all wrong. As a result, analysts have been scrambling to upgrade their revenue and earnings forecasts for the company.
And this has had a major impact on the stock’s valuation.
The computer industry is going through two simultaneous transitions — accelerated computing and generative AI. A trillion dollars of installed global data center infrastructure will transition from general purpose to accelerated computing as companies race to apply generative AI into every product, service and business process. Our entire data center family of products — H100, Grace CPU, Grace Hopper Superchip, NVLink, Quantum 400 InfiniBand and BlueField-3 DPU — is in production. We are significantly increasing our supply to meet surging demand for them.
Nvidia CEO Jensen Huang
The stock just got cheaper
If we go back to the end of last week when Nvidia’s share price was $313, analysts were expecting earnings per share of around $4.60 for the financial year ending 29 January 2024. So the forward-looking price-to-earnings (P/E) ratio here was about 68.
After the company’s results however, the consensus earnings forecast for this year has risen to $7.10. So even though Nvidia’s share price is now much higher than it was, at $380, the forward-looking P/E ratio is considerably lower at 54.
In other words, the stock is now significantly cheaper than it was a week ago.
Of course, this is still a lofty valuation. This adds risk. And after such a large increase in the share price, there is always the chance of a pullback.
It’s worth pointing out, however, that since the results, many analysts have increased their price targets for the stock (substantially).
For example, analysts at Goldman Sachs have raised their target price from $275 to $440 while JP Morgan analysts have gone from $250 to $500. This is certainly encouraging.
I’m holding… for now
Given that the valuation is now lower than it was, I won’t be taking any profits here just yet.
Ultimately, the latest results have shown that Nvidia is the real deal when it comes to AI. And I think the stock has further to run in the near term.
That said, if it continues to surge, I may take some profits down the line for risk-management purposes. If there’s one thing I’ve learnt in recent years, its how it’s important to ‘right-size’ stock positions in a portfolio.
