Performance soars, valuation declines: When NVIDIA(NVDA.US) is regarded as a value stock, where does the incremental capital come from?

Zhī Tōng Finance APP noticed that after Nvidia (NVDA.US) announced results far exceeding expectations on Wednesday, it became one of the most growth-potential stocks in the market. However, why does its trading price look like a value stock?

The chip giant’s stock price fell 5.5% on Thursday, marking its largest single-day drop since April 16, and pulling the S&P 500 index down along with it. The stock is currently trading at about 22 times forward earnings, far below its 37-times five-year average level, and only slightly above the S&P 500 index’s average valuation multiple.

Because analysts have been raising their earnings forecasts, based on Nvidia’s first-quarter revenue guidance of $78 billion (well above Wall Street’s prior consensus expectation of about $73 billion), this P/E ratio figure is expected to decline further.

“There’s a disconnect between such strong results and lackluster share-price performance,” Robert Paflick, a senior portfolio manager at Dakota Wealth Management, which holds Nvidia stock, said. “You would certainly think that after a financial report like this, it would perform well. The company has shown very strong growth.”

Data shows that Nvidia’s P/E ratio is cheaper than that of about one-third of the stocks in the S&P 500, but its 65% revenue growth rate over the past 12 months ranks third in the index. By contrast, Palantir’s revenue expansion ranks fourth in the S&P 500, while its share-price trading multiple is about 98 times forward earnings.

Nvidia’s sales growth isn’t enough to justify its premium valuation

The reason the chip maker’s earnings and stock-price trajectory are moving in opposite directions is that investors are no longer focusing on its financial data. Instead, Wall Street is worried that the thousands of billions of dollars in spending promised by AI developers such as Meta, Alphabet, Microsoft, and Amazon will have to be scaled back. If that happens, it could deal a heavy blow to Nvidia’s revenue.

Daniel Pielin, a portfolio manager at Sands Capital Management, which holds Nvidia stock, said the selloff “is entirely because the market is basically asking: is this the peak?” “This sentiment then also seeped into valuation multiples.”

Before Nvidia released its earnings report, the market had already been uneasy about the AI space, because concerns about the returns on massive spending and the disruptive threats posed by the technology had previously led software makers and other companies’ stock prices to fall.

Murphy&Sylvest Wealth Management’s market strategist and senior wealth manager Paul Nolte said, “This is kind of a lose-lose situation for Nvidia—what kind of results it reports hardly matters,” “At the end of the day, when will we see a clear path to turning all those capital expenditures into profits?”

In addition, there’s another question: for a stock that has risen nearly 1,000% since ChatGPT was released in November 2022, how much upside is left?

Jay Goldberg, a senior analyst at Seaport Group, said, “Where is the next incremental buyer? All the big shareholders, long-only funds—they already bought as much as they possibly can, they’ve reached their limit,” and he is the only analyst giving the stock a “sell” rating. “So even if it looks cheap, nobody can really step in to pick up a bargain.”

Of course, Wall Street still has a very positive view of Nvidia, because many stock-market professionals believe that the stock’s current trading multiple is among the lowest levels since last April’s “tariff panic” selloff, making it extremely attractive. As investors have sold off mega-cap tech stocks and rotated into sectors currently considered to be lower risk, the stock has been stuck in a narrow trading range.

“Nvidia really looks like a value investment opportunity,” said Justin Jass. Desai, a research analyst at Global X. “The stock price is being penalized by position adjustments and sector rotation, not a deterioration in demand.”

The combination of expected growth and value may signal that investors should view Nvidia as an option for “growth at a reasonable price,” a strategy often used on Wall Street.

“These results show that at this valuation multiple, the stock represents very good value and opportunity,” Paflick of Dakota said. “When you look at fundamentals, valuation, and key metrics, all of them are loudly reminding you: this is a great-looking target and should be part of your investment portfolio.”

While Nvidia’s current P/E ratio may not align exactly with the levels seen for other high-growth companies, Pielin at Sands Capital is not willing to label it a value stock because it doesn’t behave like one.

“It doesn’t trade like a value stock,” he said. “Its volatility is much higher.”

Software stocks finally recoup some losses

Data shows that an exchange-traded fund (ETF) tracking the U.S. software sector is on track to post its first week of outperformance versus the Philadelphia Semiconductor Index since mid-December. On Thursday, as investors rotated out of Nvidia and into companies providing AI infrastructure, software stocks recouped some of their losses.

Earlier this week, Anthropic announced a series of cooperation agreements with software and data services providers, providing some relief to this hard-hit sector.