Source: Wall Street See
Investors need to recognize one reality: currently$NVIDIA (NVDA.US)$the trading price of stocks has reflected investors' expectations for the company's future growth, and this expectation is even higher than the most optimistic predictions of Wall Street analysts.
In an article published on Monday, media analyst Mark Hulbert warned that investors are too optimistic and it is unlikely that Nvidia will achieve such rapid growth in the future.
How fast does Nvidia's profit need to grow to sustain its current strong momentum in stock price?
The answer depends on two key assumptions.
What is the rate of return for Nvidia's stocks in the next five years?
Hulbert believes that it is almost certain that it is unrealistic to assume that Nvidia's stock price will continue to grow at an astonishing rate of 176% in the past year or 100% annualized in the past five years as the company develops and the growth rate is inevitably going to decline.
Being conservative, Hulbert assumes that Nvidia's stock price will have an annual growth rate of 50% in the next five years, while many optimistic investors expect triple-digit growth in the coming years.
What will be Nvidia's P/E ratio in five years?
According to the latest fiscal year's earnings, Nvidia's P/E ratio is currently 93. However, high P/E ratios will not last forever; thus, Hulbert expects Nvidia's P/E ratio to almost certainly decline in mid-2029.
Hulbert assumes that Nvidia's P/E ratio in five years will be 50. This is also conservative because the P/E ratio of semiconductor giants is generally lower than 50, and the lower the assumed target P/E ratio, the higher the required EPS growth rate.
Based on the above assumptions-50% annualized growth rate for Nvidia's stock price in the next five years and a P/E ratio of 50-Hulbert calculates that Nvidia's earnings per share (EPS) need to grow at a rate of 70% per year to sustain its strong growth momentum in stock price, which is more than twice the 30% predicted by Wall Street analysts.
If Nvidia's EPS grows at a rate of 30%, the annualized growth rate of its stock price will only be 15.2%, which is also lower than the expectations of most investors.
Benefiting from the trend of AI, Nvidia's stock price surged 180% in the past year, and its market cap once reached $2.8 trillion, just a step away from exceeding$Apple (AAPL.US)$it. However, if future earnings growth falls short of investors' expectations, Nvidia's stock price may fall.
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Qualcomm is a warning from the past.
$Qualcomm (QCOM.US)$The stock price once soared 26 times in 1999 and was the center of attention, but its performance afterwards was disappointing.
Research by Research Affiliates shows that from 1999 to the end of 2022, its annualized ROI is only 2.8%, less than half of the ROI.$S&P 500 Index (.SPX.US)$Half of the ROI.
![](https://postimg.futunn.com/news-editor-imgs/20240603/public/17174257455723802715018.jpeg)
During this period of 23 years, Qualcomm's sales and EPS compound annual growth rates were 14% and 19%, respectively. Furthermore, the current profit is 60 times that of the 2000 high point.
How could a stock with "amazing" sales and profit growth fall behind the market by so much?
According to Research Affiliates' research, the answer is: "The good news has been completely reflected in the stock price!"
Will Nvidia repeat Qualcomm's mistake?
A study has found that it is very rare for a company's profits to continuously grow at a rate higher than the median for several years. Note that the threshold for exceeding the median is much lower than a 30% annual growth rate (according to probability theory, half of the companies can beat the median profit randomly).
This study, titled "Level and Persistence of Growth," was published twenty years ago, and was jointly completed by the University of Illinois and LSV Asset Management. The researchers analyzed all US listed stocks since the 1950s, and found that there were not many companies that crossed the median threshold. Twenty years later, a study by Verdad Research came to the same conclusion.
This means that the probability of Nvidia's profits maintaining the recent growth rate is no higher than flipping a coin. Hulbert wrote that even if Nvidia could beat the probability, the stock price is unlikely to continue to rise at the recent astonishing rate.
Editor / jayden