NVIDIA Corporation's (NASDAQ:NVDA) Popularity With Investors Is Clear
With a price-to-earnings (or "P/E") ratio of 73x NVIDIA Corporation ( NASDAQ:NVDA ) may be sending very bearish signals...
NVIDIA Corporation's (NASDAQ:NVDA) Popularity With Investors Is Clear
With a price-to-earnings (or "P/E") ratio of 73x NVIDIA Corporation (NASDAQ:NVDA) may be sending very bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 14x and even P/E's lower than 8x are not unusual. 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.
While the market has experienced earnings growth lately, NVIDIA's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Check out our latest analysis for NVIDIA
If you'd like to see what analysts are forecasting going forward, you should check out our free report on NVIDIA.
How Is NVIDIA's Growth Trending?
The only time you'd be truly comfortable seeing a P/E as steep as NVIDIA's is when the company's growth is on track to outshine the market decidedly.
Retrospectively, the last year delivered a frustrating 28% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 144% overall rise in EPS, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.
Turning to the outlook, the next three years should generate growth of 19% per year as estimated by the analysts watching the company. That's shaping up to be materially higher than the 9.1% per year growth forecast for the broader market.
With this information, we can see why NVIDIA is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Final Word
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
We've established that NVIDIA maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.
It is also worth noting that we have found 3 warning signs for NVIDIA that you need to take into consideration.
Of course, you might also be able to find a better stock than NVIDIA. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.
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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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