Nvidia is scheduled to report its earnings on Wednesday. Given the extraordinary share-price gains, it would be easy to assume its valuation has become equally extraordinary.
The European Central Bank’s (ECB) recent warning about the AI boom singled out Nvidia, saying shares had increased 20-fold since 2022 because investors assigned “option value” to AI’s potentially huge rewards.
In other words, when nobody knows how big a new technology might become, investors can justify paying a premium for the companies that could emerge as the big winners.
However, Nvidia is a slightly odd example of this phenomenon. Shares didn’t soar because investors took a punt on Nvidia becoming “the next Google”, as the ECB researchers put it.
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They soared because earnings exploded. That 20-fold increase has made Nvidia the world’s most valuable company, with a market value of $5.3 trillion.
However, shares trade at 25 times estimated earnings, little different from the S&P 500, with the multiple falling on longer-term forecasts. Bulls would argue that’s hardly excessive for a company whose revenue and earnings are expected to almost double this year.
That does not mean investors should expect the shares to rise after Wednesday’s results. Nvidia has beaten estimates in 19 of the past 21 quarters, so another beat is presumably priced in.
Indeed, the shares have fallen after each of the past four earnings reports despite beating expectations.
The outlook may therefore matter more than the quarter just finished. Analysts expect revenue of about $103 billion in the following quarter, but the bigger question is how long Nvidia can keep growing at anything like this rate.
That is also why the shares don’t trade on anything like their current earnings growth rate: investors know that growth must eventually slow.
