Popular X handle The Kobeissi Letter, which offers stock market commentary, called NVIDIA stock cheap based on its forward price-to-earnings ratio of 13, a view that was countered by users who said that the AI buildout of the past few years made its earnings artificially inflated.
In a post, the Kobeissi handle noted that after the overnight crash in tech stocks, in which NVIDIA fell close to 10%, the stock “is now trading at a Forward P/E ratio of ~13x. That's 7 turns below the S&P 500's ~20x Forward P/E and less than one-third of Walmart's ~43x.”
It went on note the apparent inherent irony in the situation, saying that “the name at the forefront of the AI buildout is now one of the "cheapest" stocks in the market.”
The price-to-earnings ratio is one of the most popular valuation methods, denoting the multiple of a company's annual profit that investors are willing to pay. High-growth companies such as NVIDIA typically trade at high valuations, while low-growth companies often get a low P/E ratio.
While being a simple calculation (mcap/earnings or stock price/earnings-per-share), its interpretation often needs nuance.
In the case of NVIDIA, the company has seen an extraordinary growth in its profit thanks to the massive AI buildout in recent years – its net profit has zoomed from $9.75 billion to $120 billion.
But critics have often said this growth has come on the back of a capex boom that may not last; others have pointed out that investments in AI resemble a suspicious “circular trade” pattern, with a web of companies placing orders with each other.
This point was made by multiple commentators in the Kobeissi post thread.
“That is only correct if earnings don't drop,” said one commentator.
“Their “earnings” are based on unsustainable funding. The hyperscalers cannot sustain this level of funding. The P/E is irrelevant,” wrote another, who added that 70% of NVIDIA's revenue come from 5 companies, who are borrowing and issuing equity.
“What about inflated future revenues? Keep P/E aside if China releases a 50% efficient hardware at dirt cheap prices no one will pay this also,” one commentator said, who conceded that NVIDA “looked like a good trading bet.”
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