NVIDIA Corp's (NASDAQ:NVDA, ETR:NVD) unrivalled explosion in revenue growth has painted the chipmaking giant into more than one corner.
It has become a given that the artificial intelligence darling will deliver supersized revenue beats in every single reporting period.
The third quarter was no different, with Nvidia reporting a 94% increase in revenue to $35.1 billion, thus smashing analyst expectations of around $33.25 billion.
Not quite good enough, declared the market, as Nvidia’s shares slid up to 2.5% in pre-market trades.
While the stock is now looking like it will open in the green, it is hardly the response a multi-billion-dollar revenue beat would typically attract.
It raises the question: Has Nvidia finally peaked? And if so, could a jumbo correction be on the horizon?
Opinions are divided. What can’t be denied is that after two years of breakneck growth, Nvidia shares are no longer cheap.
The Nvidia premium
Inverate Nvidia bull Wedbush Securities’ $175 12-month price target implies a 35 times price-to-earnings (PE) ratio against the bank’s 2027 earning estimate of $5.01 per share.
At approximately $145 a share, Nvidia is substantially more expensive than that right now.
On a trailing 12-month (TTM) basis, Nvidia has a 68 times PE ratio and a 50.5 times PE ratio on Wall Street’s current-year earnings projections.
According to data supplied by Biriyani Associates, the Nasdaq 100 set to which Nvidia belongs has a 29 times TTM PE ratio and a 31 times forward PE ratio.
Though a crude comparison, it is quite clear that Nvidia is currently more expensive than its Big Tech brethren.
The question is, is Nvidia’s premium justified?
AI’s poster child
Given its dominance of the artificial intelligence chipset market, Nvidia has emerged as the number one stock to bet on the AI revolution.
As Nvidia founder and chief executive, Jensen Huang declared to shareholders on Wednesday: “The age of AI is in full steam, propelling a global shift to NVIDIA computing.
“Demand for Hopper and anticipation for Blackwell — in full production — are incredible as foundation model makers scale pretraining, post-training and inference,” he added.
It’s not just Huang pumping his books; analysts are roundly aligned with his lofty opinion of his company.
“Nvidia is the poster child for the AI revolution,” Dan Coatsworth, investment analyst at AJ Bell, said following last night’s earnings.
“It is at the epicentre for the explosive growth in machine learning and automation, with AI being embraced by every industry imaginable on a global basis. Its chips are at the top of every company’s shopping list because it has become the hallmark for all things AI,” he added.
But these remarks came with a big caveat.
Concerns mount
According to Coastworth: “The more successful Nvidia becomes the greater the potential for an antitrust clampdown.
“It’s rare for a company to dominate an industry to the extent by which Nvidia has done with AI-related chips.
“At the moment, it feels as if rival chip companies are only getting a bite of the cherry if customers cannot obtain Nvidia products. Everyone else is second choice.”
“Competition authorities might want to know if Nvidia has simply been lucky or whether it is doing something not quite right.
“There have been suggestions that Nvidia might be making it hard for customers to switch to other vendors and/or giving preferential prices to customers who exclusively use its products.”
There is also the risk that tighter export controls to China under the incoming Trump administration could hit Nvidia where it hurts. (Perhaps Trump’s new bestie Elon Musk – a big fan of Nvidia – could have a word.)
Nvidia has already seen China sales decline after being barred from selling its high-end products there; the prospect of sales declining even further can’t be put aside.
Huang is adamant that AI has not hit a wall, but the history of tech tells us that nothing is certain.