Nvidia (NVDA), a key player in the artificial intelligence sector, has been a driving force behind the strong performance of the S&P 500 and Nasdaq indexes this year. Despite the company’s impressive gains, the latest earnings results indicate that Nvidia’s valuation, based on a critical metric, has become even more attractive. This comes as a result of the forward price/earnings ratio (P/E), a standard barometer for assessing a company’s worth and the willingness of investors to pay for its stock. Interestingly, Nvidia’s shares are now cheaper than they have been since January 5, even though the stock has risen by 250% since then.
The math behind this seemingly paradoxical situation is quite straightforward. Nvidia’s latest results and outlook have been so promising that analysts have significantly increased their projections for the company’s future earnings. This has resulted in a much more appealing forward P/E. As of July 31, the consensus among analysts was for earnings of $7.95 a share in fiscal 2024 and $11.53 in fiscal 2025. However, by Friday morning, these estimates had risen to $10.60 and $16.51 for 2024 and 2025, respectively. Consequently, Nvidia’s forward P/E has moved lower due to the increase in the denominator of that ratio, making the stock look cheaper, much cheaper.
Nvidia Stock: More Attractive Than Ever Despite Surging Shares
Despite a surge in Nvidia’s stocks this year, the latest earnings show a more reasonable valuation for the company. The forward price/earnings (P/E) ratio, a popular metric to determine a company’s worth and its stock value, reveals that Nvidia shares are cheaper than they have been since January 5, even though the stock has risen 250% since then.
A Look at the Math
Nvidia’s impressive results and outlook have led analysts to significantly increase their forecasts for the company’s future earnings. This has made Nvidia’s forward P/E ratio appear more attractive. For instance, on July 31, analysts predicted earnings of $7.95 per share in fiscal 2024 and $11.53 in fiscal 2025. However, by Friday morning, these estimates had risen to $10.60 and $16.51 for 2024 and 2025, respectively.
This increase in earnings estimates has resulted in a lower forward P/E ratio for Nvidia since the denominator in that ratio is much higher. Consequently, Nvidia’s stock appears cheaper, trading at a forward P/E of 33.8 on Friday, down from above 43 before its earnings, marking the lowest level since January 5.
Trailing P/E Ratio Drops As Well
Similar conclusions can be drawn from Nvidia’s trailing P/E ratio, a metric that reflects the price relative to earnings for the past 12 months. On Friday, Nvidia traded at a trailing P/E of 113.8, significantly down from nearly 245 on Wednesday before the earnings, reaching its lowest level since March 28.
While forward or trailing P/E ratios aren’t the ultimate indicators of a stock’s value, they provide a good starting point. They serve as a reminder for investors that those who believed the stock was fairly valued in January might still hold the same view.
Final Thoughts
The surge in Nvidia’s stock this year has been impressive, but the latest earnings reveal an even more attractive picture. Strong results and outlook have led to increased future earnings estimates, making the forward P/E ratio more appealing. Despite the stock’s rise, it now appears cheaper according to these metrics, providing an excellent opportunity for investors who saw its value earlier this year. While P/E ratios are not the only indicators to consider, they offer a valuable perspective for those navigating the post-earnings analysis landscape.
