Nvidia’s price-to-earnings ratio sinks to 7-year low as war and AI angst weigh
This suggests that its shares are a bargain, but is tied to uncertainty that has shaken investors’ confidence
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[SAN FRANCISCO] As global stock markets tumble over deepening worries about war in the Middle East, Nvidia finds itself trading at its cheapest price-to-earnings multiple since before ChatGPT kicked off the artificial intelligence (AI) boom.
The steep drop suggests that the dominant AI chipmaker’s shares may be a bargain, but one tied to risks and uncertainty that have shaken investors’ confidence in the so-called AI trade that has driven Wall Street higher in recent years.
Shares of Nvidia, the world’s most valuable company, have tumbled nearly 20 per cent from their record-high close in October.
It has been caught up in a broad market sell-off over fears that the US and Israeli war on Iran will keep oil prices elevated, and fuel a wave of inflation that could force central banks to raise interest rates.
The stock fell 2.2 per cent on Friday (Mar 27), reflecting declines across Wall Street, and is on track to lose about 10 per cent in the first quarter.
Investors have worried in recent months that heavy spending on AI infrastructure by Microsoft, Alphabet, Amazon and other Nvidia customers may be taking longer than expected to pay off with increased revenue and profits.
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These combined concerns have bled more than US$800 billion from Nvidia’s stock market value, which now stands at about US$4 trillion.
This comes as the company reported successive quarters of climbing gross margins, now at 75 per cent, and as analysts raised their estimates for future earnings growth.
As a result of those stock declines and increased analyst estimates, Nvidia’s shares are now trading at about 19.6 times its expected 12-month earnings.
This is its lowest valuation since early 2019, a year before the Covid-19 pandemic, and four years before OpenAI’s launch of ChatGPT ignited a rally in the shares of Nvidia and other AI-related stocks.
Investors use price-to-earnings multiples to compare the value of stocks in terms of their expected future earnings.
Nvidia’s valuation is also lower than the aggregate price-to-earnings ratio of the S&P 500, now at about 20 times after a 7 per cent year-to-date drop in the benchmark.
This is notable because investors typically reward fast-growing companies with higher price-to-earnings valuations than companies with slower profit growth.
Analysts forecast the aggregate earnings of S&P 500 companies growing 19 per cent in 2026, against an average growth estimate of more than 70 per cent for Nvidia in its current fiscal year, London Stock Exchange Group data showed.
Shares of software companies have slumped in recent months over worries that AI could lead to tighter competition and hurt their profit margins.
Future developments in AI technology could similarly affect hardware technology companies, including Nvidia, said Dennis Dick, a proprietary trader at Triple D Trading.
“All technology, no matter what, including Nvidia, could potentially be disrupted, and that’s the risk factor right now,” he said.
“Everything’s running on Nvidia chips, but that doesn’t mean it’s going to be that way in two or three years. Everything is changing so rapidly, and I think that’s the overall market concern.”
For most of its history, Nvidia’s primary business was designing high-performance graphics processing units for the video game market. It transitioned only in recent years to become the dominant supplier of chips for AI applications.
Its shares have surged more than 1,000 per cent since the launch of ChatGPT kicked off a race to dominate AI technology and insatiable demand for Nvidia’s components.
Microsoft has also seen its price-to-earnings ratio decline in the recent market sell-off, now down to about 20 from 35 in August last year, while AI rival Alphabet’s has come down to 24 from almost 30 in January.
Art Hogan, chief market strategist at B Riley Wealth, said his company continues to recommend Nvidia to its clients. “Trading at a multiple that is lower than the S&P 500, I think it’s an easy decision to make.” REUTERS
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