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Nvidia has seen a fantastic, geometric increase in profit [1]. This is exactly the kind of thing growth investors hope for. However, their PE ratio is currentl

Nvidia has seen a fantastic, geometric increase in profit [1]. This is exactly the kind of thing growth investors hope for. However, their PE ratio is currently 93. This is the kind of PE growth investors buy at, hoping for geometric earnings growth to kick in, not the situation after such growth has taken place. Which means they'll have to keep 2x-ing that profit for a long time to come. It could be doable but I don't see it. Even if they completely absorb Intel and AMD's market share, it doesn't make sense. [1] https://valustox.com/NVDA https://valustox.com/NVDA

what_ever 3y ago
Wouldn't 2x-ing their profit over the next year get the PE down to half? Why do they need to 2x their profit for a long time to come?
- FredPret 3y ago
  Half is still crazy; 1/4 is what I would consider a little high (I'm a value investor). Especially for a tech company, I don't understand the rationale behind high valuations. A high valuation makes sense to me if the asset will deliver a reliable cashflow over time, or if there's a high chance it'll start making much more cash in years to come. More reliable / more growth = higher premium. But tech companies come and go. Admittedly, Nvidia is more of an infrastructure company, but nobody can guarantee that they will be relevant 20 years from now, so even a PE of 20 seems risky to me.
  - what_ever 3y ago
    Value investors often miss exponential/crazy growth stories.
    - FredPret 3y ago
      I don’t care about missing stories; I care about overall performance over my lifetime. And on that metric, value investors rarely miss.
system2 3y ago
Is it always about earnings? The market is all about speculation and trust. Unless a competitor obliterates them, I don't see their stock tanking more than 10%. Look at Apple, Google, or even Boeing. Boeing's doors are flying off the planes yet their stock is still higher than October 2023 crash. Nvidia can just go for a stock split and take care of the numbers quickly.
- FredPret 3y ago
  It's about earnings (freshly made money) and equity (existing money) and growth potential (future money). One way or another, they need to have money in order to distribute it to me, the investor (through dividends or buybacks). At a valuation of 90x earnings and only $0.02 in equity per dollar of market cap, I have to pay an insane premium to acquire: - an anemic stockpile of equity ($50b in assets - $22b in liabilities = $28b in equity. Yours for only $1500b!) - a tiny cashflow of 1/90 of my investment - admittedly big growth potential So the question is - how big is that growth potential? I bet it's not high enough to justify 90x earnings.
  - system2 3y ago
    Unrelated question: Do you have any stocks you are following and expecting to go high soon?
    - FredPret 3y ago
      I'm always careful to calibrate my expectations to "one day far in the future this might work" versus expecting highs soon. I recently exited positions in US Steel and Encore Wire which were selling for single-digit PE ratios and with >$1 equity per $1 market cap at the time. My plan was to hold them forever, but the price just shot up so much and there are other things to buy. I like really boring businesses like banks, utilities, airlines that can trudge along for decades if they have to before I get my return. When you catch them in a bad news cycle, you can pick up a solid business for less than it's worth.
    - __loam 3y ago
Ologn 3y ago
What is their trailing P/E and what is their forward P/E? Their trailing P/E has January 2023, where their earnings were 1.41 billion, and revenues were 6.05 billion. Their last quarter earnings were 9.24 billion, and revenues were 18.12 billion. Their earnings last quarter were 50% more than, not their earnings in the first quarter, but their revenues in the first quarter.
- martinpw 3y ago
  This is the right way to look at it. The P/E ratio of 90+ includes two quarters of relatively low profit before things really took off in the most recent two quarters. Annualizing the forecast earnings for the next quarter leads to a P/E of 38. Still high, but not outrageous: https://www.thestreet.com/memestocks/others/will-nvidia-stock-deliver-another-stellar-earnings-report https://www.thestreet.com/memestocks/others/will-nvidia-stoc...
- FredPret 3y ago
  What you're saying is equivalent to expecting the growth curve to continue for some time. Forward PE hasn't happened yet and might never happen. Corporate earnings projections are numbers that come out of somebody's Excel and is justified by looking reasonable to an expert. It's a lot better than nothing, but I'm not betting the farm on that.

what_ever 3y ago

Wouldn't 2x-ing their profit over the next year get the PE down to half? Why do they need to 2x their profit for a long time to come?

FredPret 3y ago
Half is still crazy; 1/4 is what I would consider a little high (I'm a value investor). Especially for a tech company, I don't understand the rationale behind high valuations. A high valuation makes sense to me if the asset will deliver a reliable cashflow over time, or if there's a high chance it'll start making much more cash in years to come. More reliable / more growth = higher premium. But tech companies come and go. Admittedly, Nvidia is more of an infrastructure company, but nobody can guarantee that they will be relevant 20 years from now, so even a PE of 20 seems risky to me.
- what_ever 3y ago
  Value investors often miss exponential/crazy growth stories.
  - FredPret 3y ago
    I don’t care about missing stories; I care about overall performance over my lifetime. And on that metric, value investors rarely miss.

system2 3y ago

Is it always about earnings? The market is all about speculation and trust. Unless a competitor obliterates them, I don't see their stock tanking more than 10%. Look at Apple, Google, or even Boeing. Boeing's doors are flying off the planes yet their stock is still higher than October 2023 crash. Nvidia can just go for a stock split and take care of the numbers quickly.

FredPret 3y ago
It's about earnings (freshly made money) and equity (existing money) and growth potential (future money). One way or another, they need to have money in order to distribute it to me, the investor (through dividends or buybacks). At a valuation of 90x earnings and only $0.02 in equity per dollar of market cap, I have to pay an insane premium to acquire: - an anemic stockpile of equity ($50b in assets - $22b in liabilities = $28b in equity. Yours for only $1500b!) - a tiny cashflow of 1/90 of my investment - admittedly big growth potential So the question is - how big is that growth potential? I bet it's not high enough to justify 90x earnings.
- system2 3y ago
  Unrelated question: Do you have any stocks you are following and expecting to go high soon?
  - FredPret 3y ago
    I'm always careful to calibrate my expectations to "one day far in the future this might work" versus expecting highs soon. I recently exited positions in US Steel and Encore Wire which were selling for single-digit PE ratios and with >$1 equity per $1 market cap at the time. My plan was to hold them forever, but the price just shot up so much and there are other things to buy. I like really boring businesses like banks, utilities, airlines that can trudge along for decades if they have to before I get my return. When you catch them in a bad news cycle, you can pick up a solid business for less than it's worth.
  - __loam 3y ago

Ologn 3y ago

What is their trailing P/E and what is their forward P/E? Their trailing P/E has January 2023, where their earnings were 1.41 billion, and revenues were 6.05 billion. Their last quarter earnings were 9.24 billion, and revenues were 18.12 billion. Their earnings last quarter were 50% more than, not their earnings in the first quarter, but their revenues in the first quarter.

martinpw 3y ago
This is the right way to look at it. The P/E ratio of 90+ includes two quarters of relatively low profit before things really took off in the most recent two quarters. Annualizing the forecast earnings for the next quarter leads to a P/E of 38. Still high, but not outrageous: https://www.thestreet.com/memestocks/others/will-nvidia-stock-deliver-another-stellar-earnings-report https://www.thestreet.com/memestocks/others/will-nvidia-stoc...
FredPret 3y ago
What you're saying is equivalent to expecting the growth curve to continue for some time. Forward PE hasn't happened yet and might never happen. Corporate earnings projections are numbers that come out of somebody's Excel and is justified by looking reasonable to an expert. It's a lot better than nothing, but I'm not betting the farm on that.