Shares in Nvidia (ticker: NVDA) have experienced a significant surge this year, bolstering the overall stock market and propelling the S&P 500 and Nasdaq indexes. As the chip maker became a prominent player in the artificial intelligence frenzy, it caught the attention of investors. However, despite these impressive gains, a critical metric reveals that Nvidia’s valuation has actually become more reasonable.
Forward Price/Earnings Ratio Indicates Attractiveness
The forward price/earnings (P/E) ratio is a widely used measure that evaluates a stock’s current price relative to its future earnings. It provides insights into a company’s perceived worth and the extent to which investors are willing to pay for its stock. Surprisingly, Nvidia’s forward P/E ratio indicates that its shares are now cheaper than they have been since Jan. 5, despite the stock having risen by 250% since then.
Positive Outlook Boosts Forecasts
Nvidia’s latest financial results, along with its optimistic outlook, have impressed analysts. Consequently, these analysts have significantly increased their earnings forecasts for the company’s future. This sudden positive adjustment makes Nvidia’s forward P/E ratio appear much more attractive. According to the latest consensus among analysts surveyed by FactSet as of July 31, fiscal 2024 is expected to reflect earnings of $7.95 per share, whereas fiscal 2025 anticipates earnings of $11.53 per share.
In summary, Nvidia’s strong performance and promising outlook have contributed to an improved valuation. Investors should consider the company’s cheaper shares and the potential for future growth when evaluating their investment choices.
Nvidia’s Stock: A Closer Look at Valuation
The recent earnings report from Nvidia has had a noticeable impact on the stock’s valuation. With revised EPS estimates of $10.60 and $16.51 for 2024 and 2025 respectively, the forward P/E ratio has decreased significantly. As a result, Nvidia’s stock appears much cheaper than before, with a forward P/E of 33.8 on Friday, the lowest it has been since January 5th.
Examining Nvidia’s trailing P/E ratio, which considers the price relative to earnings over the past 12 months, reveals another noteworthy development. The stock’s trailing P/E was 113.8 on Friday, a considerable drop from almost 245 on Wednesday prior to the earnings release. This figure marks the lowest level since March 28th when the stock closed at $269.84. Notably, the stock experienced an impressive rally afterwards, opening above $502 on Thursday, representing an 86% rally.
While forward and trailing P/E ratios are not the sole determinants of stock value, they provide valuable insights for investors looking to analyze post-earnings reports. These metrics serve as a starting point in assessing whether the stock is currently undervalued or overvalued. In this case, they suggest that investors who deemed the stock fairly valued in January might hold the same opinion now.
It is important to note that valuation tools such as P/E ratios should be considered alongside other factors when making investment decisions. They provide an initial gauge of a stock’s worth but should not be the sole basis for investment choices.
Written by Jack Denton.
