Nvidia (NVDA), which is one of the biggest beneficiaries in 2023 and the most tracked AI-related stock, surged in after-hours trading following its exceptional Q1 earnings report. The notable achievements of Nvidia include:
Surpassed Revenue and Earnings Targets: Q1 Revenue was $7.19 billion, as against predictions of $6.51 billion. Its EPS of $1.09 exceeded estimates of $0.92.
Enormous Revenue Forecast: The company’s forecasting for Q2 revenue is $11 billion, as opposed to expectations of $7.18 billion! The unanticipated rise in the forecast is the likely reason why NVDA gained over $150 billion in market capitalization in after-hours trading.
Image Source: Zacks Investment Research
Pictured: Analysts will need to scramble to raise NVDA EPS estimates in the coming days.
Why is NVDA up 20% Despite Its (Apparent) High Valuation of 94x EPS?
One common mistake made by novice investors is to use valuation indicators such as price-to-earnings ratios (P/E) as a timing mechanism. Valuation does have significance, but it should be used by an investor with an incredibly long-term mindset, extensive knowledge of a company’s fundamentals, and the resilience to deal with volatility. For this reason, Warren Buffett, the most well-known and successful value investor, says, “Our favorite holding period is forever.”
However, different investors have unique styles and preferences. For shorter- to intermediate-term traders, valuation has less predictive power for three reasons:
- Valuations are based on historical data: Every fundamental metric is based on past data or future assumptions. Market conditions can change quickly with the advent of new advancements such as the internet, AI, and other “game-changing” technologies.
- The Market is the Ultimate Decider: Valuations can be insightful, but they must not be used standalone. For instance, in bull markets, high valuation stocks tend to outperform, while in bear markets, they usually underperform.
- Not Qualitative: Traditional metrics cannot be used by investors to determine decisions on non-traditional growth stories. Valuation does not consider qualitative aspects such as management quality, disruptive technology, and investor sentiment.
Takeaway
Nvidia’s earnings outperformance shows that the primary semiconductor manufacturer is the current market leader, and there is actual money backing the AI revolution. As with any innovative stock, such as NVDA, using valuation metrics in isolation is a recipe for disaster. Tech stocks such as Advanced Micro Devices (AMD) also rose in sympathy.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
