It was the greatest quarter in the history of the markets.
On May 24, Nvidia (NVDA) reported first quarter sales of $7.2 billion. This easily beat analysts’ estimates of $6.5 billion in revenue.
But the big news came a few seconds later… when the artificial intelligence (AI) chip maker said it would generate $11.2 billion in sales over the next three months.
This number may seem trivial to most investors. After all, there are over 100 companies in the S&P 500 that generated more sales last quarter than Nvidia.
What makes NVIDIA’s number standout?
The $11 billion forecast was $4 billion more than analysts were projecting before the announcement. In fact, it’s the biggest increase in guidance (vs. analysts’ estimates) in the history of the New York Stock Exchange (going all the way back to 1792).
Nvidia has been an incredible growth story for over a decade. The only knock on its stock was valuation. It’s why some investors chose to buy slower-growing industry leaders like Apple and Microsoft—which trade at cheaper valuations.
But after Nvidia’s record quarter, which I discuss in-depth in my Wallstreet Unplugged podcast, investors may want to rethink that strategy.
Here’s why…
AI has become the biggest growth trend in the world.
Industry legends—including Amazon’s Jeff Bezos, Apple CEO Tim Cook, Microsoft founder Bill Gates, and Google founder Larry Page—believe AI is the most disruptive technology to emerge in decades.
Over the past nine months, Nvidia positioned itself as the “king” of AI. Its H100 chip is the standard being used to build hundreds of AI applications, including OpenAI’s ChatGPT.
Amazon, Apple, Microsoft, and Google have spent billions on Nvidia’s state-of-the-art chips as they build out their AI platforms. These deep-pocket titans understand the importance of being first to the market. That’s why this spending is not expected to slow anytime soon.
Nvidia has been a huge beneficiary of this spending spree. Its stock price is up 230% in 2023—vs. a mere 18% gain for the S&P 500 since the start of the year.
After this incredible move, you might think you’ve missed the boat… and worry that Nvidia’s stock has run up too far too fast, or that shares are too expensive at current levels.
But the truth is… Nvidia is a bargain based on its growth profile.
In fact, Nvidia is trading at the same forward price-to-earnings (P/E) ratio as Apple and Microsoft.
More importantly, Nvidia is expected to grow its sales and earnings much faster than these tech giants over the next two years.
See for yourself…
| Forward P/E Ratio | Proj Annual Sales Growth % (2-year) | Proj Annual EPS Growth % (2-year) | |
|---|---|---|---|
| Nvidia (NVDA) | 29x | 35% | 42% |
| Apple (AAPL) | 29x | 8% | 12% |
| Microsoft (MSFT) | 29 | 15% | 17% |
| *Capital IQ Estimates | |||
Keep in mind, the forward P/E multiple is one of the most common valuation measures for a stock.
You can find it by dividing the current stock price by next year’s earnings per share (EPS).
Since these earnings haven’t happened yet, we need to use the consensus EPS estimate—the average of all the estimates from the institutional analysts who cover the stock (which happens to be 49 analysts for Nvidia).
The lower the P/E, the cheaper the stock. The higher the P/E, the more expensive it is.
Two weeks ago, Nvidia was trading around 50x forward earnings. That was a 70% premium to Apple and Microsoft.
But after reporting blockbuster earnings and raising guidance… Nvidia is now trading at just 29x forward earnings. This is what happens when the “E” in the P/E ratio grows much more than the stock price.
Of course, using the forward P/E as the only way to valuation measure would be short-sighted. We need to dig deeper into the company’s potential growth in sales and earnings over the next 12 to 24 months.
This is where Nvidia stands out.
As you can see from the table above, Nvidia is projected to grow annual earnings 4x faster and annual sales 3x faster than Apple over the next two years. And compared to Microsoft, Nvidia is set to grow its earnings and sales more than twice as fast over the same timeframe.
Based on this data, Nvidia is a much better buy based on growth/valuation than Apple and Microsoft.
I know selling Apple and Microsoft after strong runs sounds crazy. And it might seem even crazier to replace these stocks with Nvidia—a stock that’s up more than 200% over the past 8 months.
But my money is on Nvidia.
The company is trading at the same valuation as Apple and Microsoft…
It’s projected to grow earnings and sales much faster than these giants over the next two years…
And it’s the one true pure-play on AI…
A trend that has the potential to disrupt the multi-trillion-dollar global marketplace.
