Most of the time, high-growth, high-quality companies trade at a premium to the market. That’s because the market thinks that it can depend on the stock to outperform. When companies that used to have this premium lose it, investors need to pay attention. It could be a sign of shifting sentiment, or it could be a massive buying opportunity.
One company that’s finding itself in this situation is Nvidia (NASDAQ: NVDA). Are there cracks in its business? Or is something else going on here?
Nvidia’s growth is accelerating
Nvidia makes GPUs, which are the primary computing unit deployed in accelerated computing situations, like AI training and inference. Nvidia holds the largest market share by far, and with all of the elevated spending amounts from the AI hyperscalers, business is good for Nvidia.
It’s so good that it’s posting the fastest growth rates any trillion-dollar company has ever seen. During its last quarter, revenue was up 73%, and management projects another 77% gain in the current quarter. With growth like that, it’s hard to say that Nvidia’s business is struggling.
So, why does it trade at about the same price tag as the S&P 500 (SNPINDEX: ^GSPC)? I think it has to do with investors’ AI fatigue.
Investors aren’t as bullish on AI as they once were. While they can see the innovations and breakthroughs, they haven’t seen the cash flows they’d like for all of the money being spent. As a result, they’re turning a bit bearish on all of the AI spending. This might be an effort to convince management teams that spending as much as they can on AI isn’t the preferred strategy, but that’s not necessarily what will happen. Overspending on AI computing capacity is far less risky than underspending. AI could wipe out companies if they do not evolve, which is why there is so much spending going on.
Nvidia and others have noted that massive AI build-outs are likely to occur through at least 2030, so there is still plenty of time for Nvidia to be a fantastic stock to own. But just how much of a deal is it right now?
With all of the massive growth Nvidia is seeing, valuing the stock using the forward price-to-earnings method is the best idea. From this standpoint, Nvidia trades for about 21.5 times earnings estimates versus the S&P 500’s 20.3.
That essentially tells investors that after 2026 is over, Nvidia will be about a market-average stock. However, with all of the massive growth plans the AI hyperscalers have, I don’t think this will be the case.
