Does Nvidia’s heady valuation actually matter?

Exuberance over artificial intelligence (AI) means Nvidia is the hottest stock in global markets right now. Up some 170 per cent this year, it also looks expensive. Does that matter?

No one would say Nvidia, one of five US stocks (briefly) valued at over $1 trillion, looks cheap. The other four members of that exclusive club – Apple, Microsoft, Amazon and Alphabet – have annual sales ranging between $208 billion and $525 billion (€194 billion to €490 billion), notes Creative Planning strategist Charlie Bilello, compared to just $26 billion for Nvidia.

It is trading on 38 times sales and over 200 times earnings, and we have “never before seen a price-to-sales ratio that high for a company of its size”, says Bilello.

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Others, such as Ken Mahoney of Mahoney Asset Management, are less bothered about valuation. “Many naysayers will come out and say oh, such a high P/E [price-earnings ratio], I wouldn’t buy here,” says Mahoney. “To those people I would say, you should probably get a job in a different industry because you don’t know what you are talking about or doing.”

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Such dismissiveness is unwarranted. Sure, Nvidia may well go on to justify its valuation. For many years, sceptics complained Amazon’s valuation looked bubbly, but the company proved them wrong. Some growth stocks exceed even the headiest of expectations, and Nvidia may well prove to be another such example. Analysts were certainly stunned by the scale of its recent earnings beat, using words such as “epic”, “unfathomable”, “amazing”, and “jaw-dropping”.

Still, Bilello is right to caution against the general idea that valuation no longer matters in the age of AI, that it’s all about growth. “Where have we heard that before?” he asks. “In every mania of the past – AI is just the latest example.”