Nvidia Stock Valuation Analysis: Is it Time to Worry?
Red hot growth
Say what you want about Nvidia stock's epic rise, but the company is delivering on every measure with a one-two punch of high revenue growth and expanding margins.
- Revenue has more than tripled in the last year, while net income is up over 500%.
An understandable valuation
The surge in anticipated profits gives Nvidia a much more reasonable forward P/E ratio. In fact, Nvidia has a lower forward-looking valuation than Tesla, Amazon, and Microsoft.
- You would be hard-pressed to find a growth stock that has nearly quadrupled in the last year with that low of a forward P/E ratio.
The pitfalls of cyclical stocks
At the same time, there are a few reasons why focusing only on forward P/E is dangerous for a company like Nvidia. Typically, cyclical stocks have low P/E ratios during an expansion and high P/E ratios during a downturn.
- Investors can expect the P/E ratio of Deere, a cyclical company, to climb higher during a downturn, unlike Nvidia.
The story is getting better, but it's still a story
Despite expectations, Nvidia is not priced for perfection. Investors should be cautious about high expectations and cyclicality. Prospective investors must assess the stock's potential growth versus realistic valuations.
This article was prepared using information from open sources in accordance with the principles of Ethical Policy. The editorial team is not responsible for absolute accuracy, as it relies on data from the sources referenced.