Currently, only four firms can say that the total value of their outstanding shares eclipses $1 trillion: Apple, Microsoft, Google parent company Alphabet and Amazon.com.
Nvidia differs from these firms in one key way: valuation.
Valuation is a blanket term that generally refers to the ways in which the market assesses a company’s worth. This is generally measured by comparing a firm’s share price with one of its underlying financial metrics such as earnings, revenue or cash flow.
When you buy a stock, you’re buying a share of a going concern that you expect to grow into the future, and stock prices typically reflect this potential growth. In essence, investors are willing to pay more for a company than what it’s worth today.
One way to measure this phenomenon is examining the company’s stock price compared to a fundamental measure, such as earnings or sales. If a company realizes $1 in earnings per share and trades for $10 a share, it’s said to have a price-to-earnings multiple of 10.
How a particular stock’s multiple compares to its own history (has it had this high a multiple before?), to peer companies (do tech companies tend to have high multiples?) and to the stock market at large (how does this firm compare to the average S&P 500 company?) determines whether investors consider a stock over- or undervalued.
Warren Buffett looks for stocks that trade cheaply compared with their underlying value — a strategy known as value investing. Other investors are willing to pay a large premium for a company they expect to deliver explosive growth.
Now, let’s get back to Nvidia and the trillionaires.
Nvidia’s stock currently trades for 204 times the company’s earnings per share. That’s lower than Amazon’s multiple of 296, but Amazon has always been an outlier in this regard; the retail giant rakes in boatloads of cash that it could convert to earnings if it wanted to. Microsoft trades for 35 times earnings, Apple for 31 times, Alphabet for 27.
Compare stock prices to sales and the difference grows starker. Amazon trades at 2.4 times sales, pretty much in line with the average S&P 500 company. Alphabet’s price-to-sales ratio is 5.6, Apple’s is 7.5 and Microsoft’s is 11.7.
Nvidia’s: 37.8.
What Nvidia’s high valuation means for investors
Based on earnings and sales, Nvidia comes with a higher price tag than the four biggest stocks on the market.
That doesn’t mean you shouldn’t buy it, or that you should sell it if you already own it. Rather, any prospective investor in Nvidia should do two things, investing experts say.
1. Examine the hype
Nvidia is not a meme stock. Investors are piling in because they believe in the fundamentals of the chipmaker’s business.
Nvidia is the dominant player in graphics processing units — an essential component for running AI in the cloud. Tech investors have seen this as a compelling opportunity for years, and Nvidia got a boost when OpenAI released viral chatbot ChatGPT earlier this year.
“It was an iPhone moment,” says Angelo Zino, senior industry analyst at CFRA. It forced companies across a wide range of industries to rethink how and how much they’ll be investing in AI.
“That makes it really hard to look at those conventional valuation metrics when assessing the magnitude of this opportunity,” adds J.R. Gondeck, managing director with the Lerner Group at Hightower Advisors.
Basically, investors are paying big now in the belief that the company’s fundamentals will eventually justify the price tag, and even make it look cheap in hindsight.
“Given the growth opportunities we see ahead, we think the multiple is fairly reasonable,” says Zino.
2. Prepare for volatility
If you believe in the long-term potential of a hyper-growth stock like Nvidia, you have to be willing to stomach some big drops in the value of your investment to reap the benefits, say investing pros.
During broad market selloffs, companies trading at the highest multiples often get hit the hardest. When investors are betting huge on a company’s future, and that future suddenly looks bleaker, things can get scary in a hurry.
“No tree grows to the sky,” says Gondeck. “You look at Apple, which recently hit an all-time high, and there were plenty of entry points along the way.”
Of course, they’re only “entry points” — or, buying opportunities — with the benefit of hindsight. If you’ve held Apple stock for decades, you’ve likely made a pretty penny. You’ve also experienced two drawdowns of more than 80%, between 1991 and 1997 and between 2000 and 2003.
“If you’re a long-term investor in Nvidia, there’s going to be a lot of volatility along the way,” says Zino.
To keep these sort of downdrafts from derailing your portfolio returns, build a core portfolio of broadly diversified exchange-traded funds and mutual funds, financial pros say.
And keep your individual stock bets to a relatively small corner of your portfolio. If you pick right, it’s a cherry on top of your portfolio’s performance. If not, you’re still theoretically on track to meet your financial goals.
NEW YORK (AP) — Shares of Tesla soared Wednesday as investors bet that the electric vehicle maker and its CEO Elon Musk will benefit from Donald Trump’s return to the White House.
Tesla stands to make significant gains under a Trump administration with the threat of diminished subsidies for alternative energy and electric vehicles doing the most harm to smaller competitors. Trump’s plans for extensive tariffs on Chinese imports make it less likely that Chinese EVs will be sold in bulk in the U.S. anytime soon.
“Tesla has the scale and scope that is unmatched,” said Wedbush analyst Dan Ives, in a note to investors. “This dynamic could give Musk and Tesla a clear competitive advantage in a non-EV subsidy environment, coupled by likely higher China tariffs that would continue to push away cheaper Chinese EV players.”
Tesla shares jumped 14.8% Wednesday while shares of rival electric vehicle makers tumbled. Nio, based in Shanghai, fell 5.3%. Shares of electric truck maker Rivian dropped 8.3% and Lucid Group fell 5.3%.
Tesla dominates sales of electric vehicles in the U.S, with 48.9% in market share through the middle of 2024, according to the U.S. Energy Information Administration.
Subsidies for clean energy are part of the Inflation Reduction Act, signed into law by President Joe Biden in 2022. It included tax credits for manufacturing, along with tax credits for consumers of electric vehicles.
Musk was one of Trump’s biggest donors, spending at least $119 million mobilizing Trump’s supporters to back the Republican nominee. He also pledged to give away $1 million a day to voters signing a petition for his political action committee.
In some ways, it has been a rocky year for Tesla, with sales and profit declining through the first half of the year. Profit did rise 17.3% in the third quarter.
The U.S. opened an investigation into the company’s “Full Self-Driving” system after reports of crashes in low-visibility conditions, including one that killed a pedestrian. The investigation covers roughly 2.4 million Teslas from the 2016 through 2024 model years.
And investors sent company shares tumbling last month after Tesla unveiled its long-awaited robotaxi at a Hollywood studio Thursday night, seeing not much progress at Tesla on autonomous vehicles while other companies have been making notable progress.
TORONTO – Canada’s main stock index was up more than 100 points in late-morning trading, helped by strength in base metal and utility stocks, while U.S. stock markets were mixed.
The S&P/TSX composite index was up 103.40 points at 24,542.48.
In New York, the Dow Jones industrial average was up 192.31 points at 42,932.73. The S&P 500 index was up 7.14 points at 5,822.40, while the Nasdaq composite was down 9.03 points at 18,306.56.
The Canadian dollar traded for 72.61 cents US compared with 72.44 cents US on Tuesday.
The November crude oil contract was down 71 cents at US$69.87 per barrel and the November natural gas contract was down eight cents at US$2.42 per mmBTU.
The December gold contract was up US$7.20 at US$2,686.10 an ounce and the December copper contract was up a penny at US$4.35 a pound.
This report by The Canadian Press was first published Oct. 16, 2024.
TORONTO – Canada’s main stock index was up more than 200 points in late-morning trading, while U.S. stock markets were also headed higher.
The S&P/TSX composite index was up 205.86 points at 24,508.12.
In New York, the Dow Jones industrial average was up 336.62 points at 42,790.74. The S&P 500 index was up 34.19 points at 5,814.24, while the Nasdaq composite was up 60.27 points at 18.342.32.
The Canadian dollar traded for 72.61 cents US compared with 72.71 cents US on Thursday.
The November crude oil contract was down 15 cents at US$75.70 per barrel and the November natural gas contract was down two cents at US$2.65 per mmBTU.
The December gold contract was down US$29.60 at US$2,668.90 an ounce and the December copper contract was up four cents at US$4.47 a pound.
This report by The Canadian Press was first published Oct. 11, 2024.
