Investors are still paying close to 50 times earnings for the top artificial intelligence stock.
Nvidia (NVDA 8.15%) has been the ultimate growth stock to own over the past few years. Since 2021, its shares are up more than 700%. That would have been enough to turn a $15,000 investment in the stock back then into more than $120,000 today. And although it has been falling in recent weeks, it’s still among the most valuable companies in the world.
But there are always questions about its valuation, and whether or not Nvidia is finally at a peak. The stock has been coming under some pressure of late, even though the company reported another solid quarterly performance. Could this be a sign that it has finally hit a peak?
When a beat just isn’t enough of a beat anymore
If a stock is trading at more than 50 times earnings, which has normally been the case for Nvidia, expectations are going to be high. Investors, after all, are paying a premium for the business because it is a growth machine and they expect there to be more than just revenue and profit growth. Nvidia’s sky-high valuation prices in even higher expectations than that — there needs to be a solid beat and a strong guidance.
The company did well last quarter, it just may not have been good enough. Here’s how it performed in the most recent period, which ended on July 28, compared to analyst expectations.
| Metric | Actual | Expected | Beat |
|---|---|---|---|
| Revenue | $30.0 billion | $28.7 billion | 4.5% |
| Adjusted earnings per share | $0.68 | $0.64 | 6.3% |
| Current quarter revenue guidance | $32.5 billion | $31.7 billion | 2.5% |
Data source: CNBC.
Nvidia beat expectations on all metrics, but the beat wasn’t as impressive as it was a quarter earlier. Here are Nvidia’s numbers for the period that ended on April 28.
| Metric | Actual | Expected | Beat |
|---|---|---|---|
| Revenue | $26.0 billion | $24.7 billion | 5.5% |
| Adjusted earnings per share | $6.12 | $5.59 | 9.5% |
| Current quarter revenue guidance | $28.0 billion | $26.6 billion | 5.2% |
Data source: CNBC. These results are prior to its 10-for-1 stock split which took place in June.
This past quarter was a slightly less impressive beat than what Nvidia delivered for the April-ended quarter, and that could be a big part of the reason investors aren’t as bullish on the stock as they have been in the past. While the business still looks solid, it just may not be as impressive as it was before.
Is Nvidia responsible for the tech decline, or is it a victim of a broader sell-off?
Artificial intelligence (AI) stocks have been declining in recent months and Nvidia’s losses have been a bit worse than average. Its shares are down more than 12% in the past three months while the Robo Global Robotics and Automation Index ETF and the Global X Robotics & Artificial Intelligence ETF have both dropped by around 5% during that period. Nvidia is often a big component of many tech and AI-focused exchange-traded funds (ETFs) so if it does badly, it’s probable that many top funds will also struggle.
But I don’t believe Nvidia is responsible for the broad sell-off in AI and tech stocks of late. Stocks have been climbing to absurd prices and with Nvidia’s valuation topping more than $3 trillion, becoming one of the most expensive stocks in the world, it may have prompted investors to start to question how much more upside there might be left for the stock. And the possibility of a recession looming larger amid underwhelming job numbers is likely putting even more pressure on growth-oriented stocks these days.
Ultimately, I don’t think Nvidia’s earnings numbers gave investors much of a reason to sell the stock, but those who did likely were looking for any reason to cash out. And that could indeed be a sign that the stock may have finally hit a peak — at least in the near term.
Is it too late to buy Nvidia’s stock?
Nvidia’s stock may have peaked in the near term, but that doesn’t mean it can’t possibly recover or go higher in the future. Given its leadership in the AI chip market and the brand it has built up in recent years, the stock should continue to get more valuable as economic conditions improve. But anytime a stock becomes this expensive, it’s worth it for investors to consider why they are paying such a premium for the business. Nvidia was effectively priced to perfection, and any sign of weakness could prompt a sell-off.
If you’re looking for an investment to hang on to for several years, then no, it probably isn’t too late to invest in Nvidia’s stock. But if you’re expecting some significant gains in the next year or two, then you could be disappointed with Nvidia. Iin that case, you may be better off pursuing more modestly priced growth stocks instead.
David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
