When close to half the companies in the United States have price-to-earnings ratios (or “P/E’s”) below 14x, you may consider NVIDIA Corporation (NASDAQ:NVDA) as a stock to avoid entirely with its 45.5x P/E ratio. Although, it’s not wise to just take the P/E at face value as there may be an explanation why it’s so lofty.
Recent times haven’t been advantageous for NVIDIA as its earnings have been rising slower than most other companies. One possibility is that the P/E is high because investors think this lacklustre earnings performance will improve markedly. You’d really hope so, otherwise you’re paying a pretty hefty price for no particular reason.
See our latest analysis for NVIDIA
Keen to find out how analysts think NVIDIA’s future stacks up against the industry? In that case, our free report is a great place to start.
What Are Growth Metrics Telling Us About The High P/E?
In order to justify its P/E ratio, NVIDIA would need to produce outstanding growth well in excess of the market.
If we review the last year of earnings growth, the company posted a worthy increase of 8.8%. This was backed up an excellent period prior to see EPS up by 176% in total over the last three years. Therefore, it’s fair to say the earnings growth recently has been superb for the company.
Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 11% each year over the next three years. Meanwhile, the rest of the market is forecast to expand by 9.4% each year, which is not materially different.
In light of this, it’s curious that NVIDIA’s P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren’t willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.
What We Can Learn From NVIDIA’s P/E?
It’s argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
We’ve established that NVIDIA currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it’s challenging to accept these prices as being reasonable.
Plus, you should also learn about this 1 warning sign we’ve spotted with NVIDIA.
If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E’s below 20x.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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