Nvidia may be currently the most expensive stock in the S&P 500 index, with a forward market to sales ratio - the ratio of market value to expected sales over the next 12 months - of approximately 23 times.
However, whether this valuation level is reasonable or not, perhaps no one knows at the moment: in the current booming trend of artificial intelligence, no one can accurately calculate how much actual revenue this leading AI chip manufacturer will achieve, whether it is Wall Street analysts focusing on Nvidia or Nvidia executives themselves.
Nvidia's H100/H200/GB200 and other AI GPUs have increasingly become essential core hardware for driving generative AI applications such as ChatGPT.
In fact, over the past year, with the frenzy surrounding artificial intelligence leading to a surge in demand for Nvidia chips, Wall Street's quarterly financial performance estimates for Nvidia have repeatedly become a laughing stock - even though Wall Street analysts keep tearing up reports, they are still rarely able to keep up with Nvidia's growth pace, making their valuation forecasting work increasingly difficult.
It is obvious that Wall Street analysts are not fabricating numbers casually, but are trying to obtain information from management like they do with other companies. However, even NVIDIA's leadership finds it difficult to predict how much revenue and profit this chip manufacturer will generate in the next three months.
A set of statistics shows that since Nvidia's sales exploded in the fiscal quarter ending in April 2023, its quarterly revenue has been on average 13% higher than the company's own median forecast, which is more than twice the average error level of the past decade.
Among them, when Nvidia released its financial report in August last year, its sales exceeded expectations by 23%, the largest deviation since 2013.
Why are performance forecasts so difficult to predict?
Regarding this, Brian Colello, an analyst at Morningstar, said that the difficulty in modeling Nvidia's performance is partly due to the fact that supply is the most uncertain variable when demand is strong, which makes this chip manufacturer particularly unique at present.
Colello stated that assuming Nvidia's ability to increase supply continues to steadily improve, he expects Nvidia's revenue growth in the second quarter to conservatively reach $4 billion.
According to the financial report, Nvidia achieved a revenue of $26 billion in the first quarter, an increase of 262% compared to the same period last year; Q1 net profit was 14.81 billion US dollars, a year-on-year increase of 628%.
"I am not the first analyst to raise the target price or fair value, nor am I the first analyst to be surprised by revenue far exceeding our expectations a year ago," Colello said. "This (predicting Nvidia) is interesting and meaningful, but of course it is also very challenging."
Colello is not the only one who has recently raised Nvidia's expected target price. Just last Friday, Melius analyst Ben Reitzes also raised Nvidia's target price for the fifth time this year - from $125 to $160, which means Nvidia's stock price will continue to rise by 26% compared to last Friday's closing price.
Of course, there are also many traders currently chasing NVIDIA solely based on its upward momentum. Nvidia's growth rate this year has reached 156%, and it briefly topped the "global stock king" with a market value of $3.34 trillion, surpassing Microsoft last Tuesday.
According to Bank of America's analysis of EPFR Global data, this surge helped drive a record $8.7 billion inflow of funds into technology funds for the week ending June 19th. However, on Thursday and Friday last week, Nvidia's stock price fell 6.7% from its high point, and its market value shrank by over $200 billion.
But for investors who tend to focus on discounted cash flow models, the gap between current performance estimates and actual results is clearly posing challenges.
According to industry compiled data, analysts' estimates of Nvidia's sales have deviated from actual results by an average of 12% over the past five quarters. This ranks third among companies in the S&P 500 index. These companies included in the forecast statistics need to have an average quarterly revenue of at least $5 billion in the past five quarters, and at least 20 analysts have conducted forecast analysis on them.
May risks also be hidden?
With the booming development of Nvidia's AI chip business, its largest customers (such as Microsoft) have promised to invest more funds in computing hardware in the coming quarters. The main issue faced by investors is, what should be a reasonable valuation for Nvidia's stock, which has significantly higher profit and sales growth than similar giant companies?
Note: The diagram on the left shows the three-year capital expenditure of the five major technology giants, while the diagram on the right shows Nvidia's data center business revenue
According to current estimates, Nvidia's sales for this quarter are expected to reach $28.4 billion, with profits reaching $14.7 billion, an increase of 137% and 111% respectively compared to the same period last year. As a comparison, Microsoft's sales are expected to only grow by 15%, and Apple is expected to only grow by about 3%.
Although Nvidia has high valuation multiples such as P/E ratio and P/S ratio, considering Nvidia's high growth potential, especially considering its previous underperformance, these valuation multiples do not seem unreasonable.
But Michael O'Rourke, Chief Market Strategist at Jonestrading, believes that what is even more concerning is that due to the company's large size, Nvidia's ability to surpass Wall Street's growth forecasts will soon begin to weaken. This may make its stock price more difficult to justify in the future.
O'Rourke said, "This is where the risk lies. You are paying a high price for a company with a huge market value, and the company's future performance may start to decline beyond expectations, and this situation is likely to continue."