Nvidia is looking cheap to some as 220% rally stalls

Nvidia bulls are starting to throw around an adjective rarely used for a stock that’s more than tripled in less than a year: cheap.

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That’s the view of investors like Alec Young, chief investment strategist at Mapsignals, who have watched Nvidia shares trade in a $100 range since the summer, meandering after rallying to near $500 in August. But with profit estimates still rising, Nvidia’s price relative to expected earnings has fallen to the lowest since mid-2022.

“The stock is actually very cheap,” said Young, adding that its price to earnings ratio is less than the company’s estimated growth rate, which is uncommon.

Michael Sansoterra, chief investment officer at Silvant Capital Management, also puts Nvidia’s valuation in the cheap group.

“It’s growing decidedly faster than the great majority of other companies,” he said. “It’s relatively inexpensive.”

Of course, Nvidia’s valuation is based on profits that have yet to materialize in an industry that even bulls acknowledge is highly cyclical. On a trailing basis, Nvidia is priced around 35 times sales, making it the most expensive stock in the S&P 500 by far. Second-placed Cadence Design is half as as expensive, and the benchmark average is 2.4 times.

That’s too costly in the eyes of many investors including Ark Investment Management’s Cathie Wood, who said in September that Nvidia is an expensive and obvious way to play the artificial intelligence trade. Exchange-traded funds managed by Wood’s firm have sold Nvidia shares in recent months. Robert Arnott, founder of Research Affiliates LLC, sees Nvidia as a potential bubble that’s “priced beyond perfection.”

Nvidia reports earnings on Nov. 21 and investors will be paying close attention to what the company has to say about China, where the US has tightened restrictions on sales of advanced semiconductors. Nvidia shares inched higher on Thursday after a report from a state-affiliated news outlet in China said the chipmaker plans to release three new artificial intelligence chips in the country.

To David Klink, senior equity analyst at Huntington Private Bank, Nvidia’s growth outlook appears to remain robust. However, any signs of a slowdown would bring trouble for the stock, he said.

“That really rapid growth going forward, that’s where you need to sustain what seems like a bargain valuation,” said Klink.

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Big Tech’s profit outlook is another reason it will outperform small caps. The group, along with consumer discretionary, is among the biggest winners so far this earnings season, data compiled by Bloomberg show. And analysts’ 12-month profit estimates for the tech-heavy Nasdaq 100 relative to the small cap Russell 2000 are at a record high.

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Earnings on Friday

—With assistance from Subrat Patnaik and Sagarika Jaisinghani.

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