Took me a long time to understand how market cap valuations work, hopefully this post is helpful for someone. The market values a company not by revenue, and not even just by current earnings (aka net income or profit after taxes), but more importantly future earnings. This is why smaller but fast growing companies often have a higher PE (price-to-earnings) ratio than a big, stable but slow-growing company. Nvidia made $60B revenue, but more importantly, $29.7B net income (almost 50% profit margin, unheard of for hardware companies, but I digress). It is anticipated to make $150B revenue and $80.7B net income in 3 years from now (FY 2026), attached screenshot from https://simplywall.st/stocks/us/semiconductors/nasdaq-nvda/nvidia/future If you consider the $81B estimated net income three years from now, their future PE ratio based on a current $2T valuation is 25, while the median tech PE ratio is 30-40 now. Just to compare, here's a few other big tech companies for reference: Company name, current market cap: 2023 net income -> 2026 net income (estimates) * Microsoft, $3T: $72B -> $115B * Apple, $2.8T: $100B -> $114B * Nvidia, $2T: $29.7B -> $81B * Amazon, $1.8T: $30B -> $74B * Google, $1.8T: $74B -> $109B * Facebook, $1.2T: $39B -> $67B
OP great explanation. I am new to this. does one should invest in nvidia right now? seem the stock price is very high
Ha remember the saying "markets can stay irrational for longer than you can stay solvent" 😅 If I could predict stock movement correctly, I would have been retired a long time ago 🙂 I've been burnt by individual stock pickings before, I'm staying safe with index funds mostly 🙂 I unfortunately can't advice you on whether to invest in NVDA or not.
What OP is saying that Nvidia has to make 80B income by 2026 to justify the current price and it is on track now. For you to see a great return from this point it has to make ~100B. That means a revenue of 200-220B dollars. So everyone and their mother have to buy H100 and H200 and train super large models 😛
Amazon willl double the profit in 3 years? How?
I'm guessing cost-cutting, actually it was making very little profit for most of its existence, $30B annual profit for Amazon (2023) was unthinkable just a few years ago.
Prime video ads? LLMs on AWS? And other businesses. I don’t know.
Just another hype of AI, hold your horses until next 6 months and see how stock market will have sad impact...😔
Great post mate. Nvidia is the only company now which can fulfill the ai needs of all hence high valuation is expected. But still earnings to valuation ratio is insane. It should saturate now else it will reach a place which will hurt the complete economy.
I agree current PE is high, but future PE is reasonable, no? What do you think?
PE is decreasing with each earnings report. It’s not the highest PE by a long shot.
What would valuation of ORCL be? (The site is forcing me to sign up).
So a lower PE is better than high PE?
Yes means it’s more sustainable.
Great summary OP. Been seeing a lot of posts from people who have no idea what they’re talking about with respect to Nvidia’s earnings. Hopefully this is educational to them
"Expected" is the keyword.
People forget how come a hardware company (NVDA) which sits in the bottom of the profit pyramid can value far exceeding the end consumer company (MSFT, GOOG, etc) which sits in the top of profit pyramid. This won’t last long unless NVDA move to the top of the pyramid which means NVDA must no longer be just a hardware company but rather a computing service company.
NVDA can buy Databricks, OpenAI / other competitors with lofty stocks. Long term NVDA can remain $2T range, as it would take 10 years to get strong contender to take GPU pies.
Awesome simplification!! Love it!
Glad it was helpful 🙂