Nvidia sales grow so fast that Wall Street can’t keep up

San Francisco - Nvidia is the most expensive stock in the S&P 500 Index, with its shares trading for roughly 23 times the company’s projected sales over the next 12 months.

But there is a problem with that valuation. In the age of the artificial intelligence (AI) boom, no one can figure out what the chipmaker’s revenues are actually going to be – not the Wall Street analysts covering Nvidia or Nvidia executives themselves. So how are investors supposed to calculate whether the shares are expensive or not?

For more than a year now, a surge in demand for Nvidia’s chips sparked by the frenzy surrounding AI has made a mockery of Wall Street’s quarterly financial estimates. Analysts are not making up numbers, they take their cues from management, like they do with every other company. However, even Nvidia’s leadership is struggling to anticipate how much money the chipmaker will generate three months into the future.

Since

Nvidia’s sales began exploding

in its fiscal quarter that ended in April 2023, revenue has exceeded the midpoint of the firm’s own forecast by an average of 13 per cent, more than twice the average over the past decade. When Nvidia reported results in August, sales topped its projection by 23 per cent, the biggest beat since at least 2013, data compiled by Bloomberg shows.

Part of what makes modelling for Nvidia so hard is that supply is the most uncertain variable when demand is booming, making the chipmaker unique, said Morningstar analyst Brian Colello, who in May raised his price target for the shares to US$105 from US$91. They are trading at around US$127 now.

Assuming steady improvement in Nvidia’s ability to increase supply, Mr Colello said he adds up to US$4 billion (S$5.4 billion) to Nvidia’s quarterly revenue to ballpark the upcoming quarter’s sales.

Mr Colello is not the only one raising his price estimate. On June 21, Melius analyst Ben Reitzes raised his price target on Nvidia for the fifth time this year, to US$160 from US$125, implying a gain of 26 per cent from the stock’s June 21 closing price.

Of course, there are plenty of traders buying Nvidia solely based on momentum. Nvidia has gained 156 per cent in 2024 and overtook Microsoft on June 18 to briefly become the world’s most valuable company at US$3.34 trillion. Nvidia shares have since fallen 6.7 per cent, erasing more than US$200 billion in market value.

For investors inclined to stare at discounted cash flow models that have more variability than they have in the past, the gap between estimates and actual results has created a conundrum.

In the past five quarters, analyst estimates for Nvidia’s sales have deviated from actual results by an average of 12 per cent, according to data compiled by Bloomberg. That is the third-most among the S&P 500 companies that have posted average quarterly revenue of at least US$5 billion in the last five quarters and have at least 20 analysts covering them.

What price?

With Nvidia’s business booming and its biggest customers like Microsoft pledging to spend even more on computing hardware in coming quarters, the main question for investors is what is a reasonable price to pay for a stock whose profit and sales growth is far superior to its megacap peers.

Based on current estimates, Nvidia is projected to deliver profit of US$14.7 billion on sales of US$28.4 billion in the current quarter, up 137 per cent and 111 per cent, respectively, from the same period a year ago. Meanwhile, Microsoft’s sales are expected to rise 15 per cent with Apple projections sitting around 3 per cent.

While Nvidia’s valuation multiples are rich, they look more reasonable given Nvidia’s growth, especially considering the estimates keep coming in low. To Mr Michael O’Rourke, chief market strategist at Jonestrading, a bigger concern is that the degree to which Nvidia surpasses Wall Street’s growth expectations will soon start subsiding, just due to the company’s sheer size. That could make it harder to justify the shares’ price tag.

“That’s where the risk comes in,” Mr O’Rourke said. “You’re paying a high price for a large market cap company where the beats have been trending lower and that’s likely to continue.” BLOOMBERG