The odds are against high-flying Nvidia

Apple shares may look a bit pricey, but not compared to the latest trillion-dollar stock, high-flying Nvidia. It trades on 25 times expected sales – more than any other S&P 500 stock.

Can Nvidia justify the hype? Probably not, suggests WisdomTree’s Jeremy Schwartz. He notes 231 companies reached similar valuation multiples to Nvidia over the past 50 years. Only 20 per cent beat the market over the next year, with the median stock underperforming by 36 per cent. Over 90 per cent underperform over three, five- and 10-year periods.

That said, the fact Nvidia is the most expensive US stock means momentum may carry it higher. Schwartz looked at 99 companies with the highest price-sales ratios over the last six decades. In such cases, the median stock slightly outperformed the S&P 500 over the next year.

[ Nvidia hits $1tn market cap as chipmaker rides AI wave ]

[ Is high-flying Nvidia dangerously overvalued? ]

However, this outperformance was fleeting – over the next three- and five-year periods, they typically underperformed the market by over 10 per cent annually. This underperformance wasn’t because of lousy fundamentals. Over the following five- and 10-year periods, even the worst-performing stocks grew sales by an annualised 30 and 23 per cent, respectively.

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These are huge numbers, but they weren’t enough due to their stratospheric valuations. A few final stats: just 8 per cent of the priciest stocks outperformed over the following five- and 10-year periods. Over 20 years, 4 per cent outperformed. Maybe Nvidia will deliver for shareholders, but history suggests the odds are stacked against it.