Stock market

Nvidia shares hit a new high after record earnings. Is there more to come?

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Nvidia (NASDAQ: NVDA ) beat earnings forecasts on Wednesday (May 22), and shares jumped 7% at the market open on Thursday.

Sales rose to $26bn in the three months to April 30, ahead of analysts’ target of £24.6bn.

Earnings per share (EPS) also beat estimates of $5.60, coming in at $6.12.

AI enhancements

Revenue has grown by 268%, with profits growing more than six times compared to the same quarter in 2023. Artificial intelligence (AI) is largely behind the growth frenzy, with revenue from the firm’s data center division increasing by more than 400%.

Nvidia also announced a 1-for-1 stock split. That won’t change the company’s value, but it should make investing in the stock a little easier for small investors.

We can only buy and sell in whole numbers. And with the share price already over $1,000 before the split, there’s not a lot of flexibility.

Rising price

Nvidia stock is up 2,500% over the past five years. But I find it hard to wrap my head around some of the numbers we’re seeing here.

It has a market cap of over $2.3trn. Yes, trillion dollars. There are 12 notes on it. Still very dizzy on the mind? try it out…

Its market cap is equal to the projected GDP of Italy in 2024. It would take the full value of all goods and services sold in the EU’s third-largest economy to buy Nvidia.

And Nvidia is still only the third largest company in the US. It is made by the UK. Astra ZenecaJust look like a penny stock, with a market cap measured in the billions.

Predictions

Even after this surprising increase, analysts still expect Nvidia’s EPS to triple between 2024 and 2027.

The valuation must be sky high, surely? Well, we are looking at a forecast price-to-earnings (P/E) ratio of over 40 for the year 2024-25.

But that’s a long way from the multiplier of about 120 to be reached in 2023. And these earnings growth forecasts could drive the P/E down to 26 by 2027. It doesn’t look very steep at all, even by UK growth stock standards.

What are the risks?

Does it sound too good to be true?

I see a lot of danger here. One is that there is a huge amount of competition emerging in the AI ​​market. As billionaire investor Warren Buffett famously pointed out, the pioneers of aviation technology weren’t the ones who made all the money.

Some big investors are already looking elsewhere for AI development. For example, Cathy Wood is selling Nvidia, and investing in smaller stocks like UiPath.

Gambling for profit?

So yes, I think it might be a bit of a gamble to buy Nvidia now, we have a lot of leverage behind us.

But then, if those predictions come true, and we see the P/E drop to 26… I’m tempted, maybe by a small amount. After all, I only need $102 to get in now!


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