Pro Perspectives 6/18/24






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June 18, 2024

A little more than twelve months ago, Nvidia shocked the world in its Q1 2023 earnings report.  Jensen Huang revealed an explosion in demand for Nvidia’s AI chips, explosive revenue and operating income growth, and eyepopping guidance for the quarters to come.

Moreover, he declared that a new technology revolution was underway.

It was the “Nvidia moment.”  And in my note that day, I said “Nvidia may be challenging Microsoft and Apple as the biggest company in the world very soon (joining the multi-trillion dollar market cap club).”

Indeed, today Nvidia surpassed both Microsoft and Apple as the largest company in the world by market cap ($3.3 trillion).

Has it gone too far, too fast?

Remember, we looked at this chart heading into Nvidia’s earnings last month.


The chart shows the trajectory of Nvidia’s valuation taking end of reporting quarter share price and dividing it by four times the end of reporting quarter EPS (i.e. annualized quarterly EPS).

So, we went into Nvidia earnings last month with the stock near another record high, having more than tripled since the “Nvidia moment,” but also having gotten cheaper along the way (as you can see in the chart above).

How did it get cheaper?  Not only did revenues quadruple over five quarters, but the profitability of each dollar of revenue doubled over the same period. And net income margins doubled over five quarters.

So, the stock got cheaper over the past year because earnings growth was outpacing growth in the share price.

Fast forward to today, and the stock has gone up another 42% from the levels just prior to last month’s earnings report.

Let’s take a look at what this sharp rise (primarily driven by the stock split) has done to valuation.

As we’ve discussed, quarterly revenue growth in Nvidia has been hot, but it has been declining, from 88%, to 34%, to 22%, to 18% in the most recent quarter.

The guidance for next quarter is for a much more modest 7% quarterly revenue growth.

Let’s assume they beat guidance and do the average quarterly revenue growth of the past two quarters (which would be 20% growth).

Here’s what the valuation picture looks like.



It’s no longer getting cheaper.  And if the quarterly revenue growth rate fades (which would translate into a fading EPS growth rate), the stock starts getting very expensive, despite its very important role in the new technology revolution.