Abstract:
Nvidia's falling stock valuation is raising red flags about the chipmaker's prospects of sustaining its explosive profit growth. Data shows that NVIDIA's current stock price is less than 17 times its estimated earnings in the next 12 months, which is the lowest cheap level in more than a decade. This is only half of what it will be in 2025 (when Nvidia's revenue and profit growth is slower), and significantly lower than the estimated price-earnings ratio of more than 25 times set in May this year.
This shows healthy skepticism about the sustainability of the company's current profitability, said Eli Horton, senior portfolio manager of thematic stocks and sustainable growth stocks at TCW. Nvidia's stock performance is surprising given its amazing fundamental backdrop, but it also tells you that market expectations are lower than the current consensus estimate.
Although Nvidia shares ended a five-day winning streak on Monday, its discounted valuation persists. This follows a broader rally in semiconductor stocks. Earlier calls from AI industry leaders to slow down the development of the most advanced AI models spooked investors, causing the Philadelphia Semiconductor Index (SOX) to fall nearly 6% on September 14.
The index rose 4.3% on Monday, its biggest one-day gain since August 4, after initial signs of success for Meta's new AI agent boosted market optimism about chip demand.
While there are many concerns about the overall outlook for AI computing equipment spending amid opposition to data center construction and rising interest rates, there are currently no signs that infrastructure investment will slow down in the short term.
Nvidia’s revenue and net profit are expected to jump 90% and 99% respectively in the 2027 fiscal year ending in January. The growth rate of both indicators in the previous year was 65%. In its second-quarter financial report released last month, Nvidia estimated that sales in fiscal 2028 would grow by 70%, much higher than the previously expected 45% growth rate.
Nvidia’s stock price rose by 22% in 2026. This performance ranked second among the “Big Seven Technology”, second only to Apple’s 25% increase. However, this increase pales in comparison to other semiconductor manufacturers.
Led by memory chip maker Micron Technology and Nvidia rivals Intel and AMD, the semiconductor index has risen nearly 76% this year, with all three companies rising more than 180%. Nvidia ranks fifth from the bottom in the index, which currently trades at 20 times forward earnings.
The disconnect between Nvidia's strong fundamentals and its stock valuation prompted CEO Jensen Huang to declare that Nvidia is "the world's first and only growth value stock." He told a Goldman Sachs technology conference earlier this month that the company was "seriously misunderstood."
He said, "We are not only growing, but we are also expanding our market share."
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