Source: Caixin.

$NVIDIA (NVDA.US)$Perhaps one of the most expensive stocks in the S&P 500 index, its forward P/S ratio (market capitalization divided by estimated sales over the next 12 months) is around 23 times.

However, no one may know whether this valuation level is reasonable or not now: in the current boom of artificial intelligence, neither Wall Street analysts focused on Nvidia nor Nvidia executives themselves can accurately calculate how much actual income this leading AI chip manufacturer can achieve.

Nvidia's H100/H200/GB200 and other AI GPUs have increasingly become a core hardware driving generative AI applications such as ChatGPT.

In fact, over the past year or so, as the frenzy around AI has triggered a surge in demand for Nvidia chips, Wall Street's quarterly financial performance estimates for Nvidia have repeatedly become a laughingstock - even though analysts keep 'ripping reports,' they still rarely keep up with Nvidia's revenue growth, making their valuation forecasts increasingly difficult.

Obviously, Wall Street analysts are not making up numbers at random, but trying to get information from management like any other company. However, even Nvidia's own leadership finds it difficult to predict how much revenue and profit this chip maker will generate in the next three months.

A set of statistics shows that since Nvidia's explosion in sales volume in the quarter ended in April 2023, its quarterly revenue has averaged 13% higher than the median forecast by the company itself, which is more than twice the average error rate over the past decade.

Among them, when Nvidia released its financial report in August last year, sales exceeded expectations by 23%, the largest deviation since 2013.

Why is it difficult to forecast performance?

According to Brian Colello, an analyst at Morningstar, one reason why modeling Nvidia's performance is so difficult is that when demand is strong, supply is the most uncertain variable, which makes the chip maker particularly different.

Colello said that assuming Nvidia's ability to increase supply continues to steadily improve, he expects the company's revenue growth for the second quarter to be conservatively $4 billion.

According to the financial report, Nvidia achieved revenue of $26 billion in the first quarter, a year-on-year increase of 262%; Q1 net profit of $14.81 billion, up 628% year-on-year.

"I'm not the first analyst to raise the target price or fair value, or the first analyst to be surprised by revenue that far exceeded expectations from a year ago," Colello said. "It's interesting, meaningful, but of course, challenging to forecast Nvidia.

Colello is not the only one who has recently raised his expected target price for Nvidia. Last Friday, Melius analyst Ben Reitzes raised Nvidia's target price for the fifth time this year - from $125 to $160, which means Nvidia's stock price will rise 26% from last Friday's closing price.

Of course, many traders are currently chasing Nvidia by its upward trend alone. Nvidia's gain this year has reached 156% and briefly surpassed Microsoft with a market value of $3.34 trillion, ranking first in the world's stock market.

According to Bank of America's analysis of EPFR Global data, as of the week ending June 19, this surge has helped push record $8.7 billion in fund inflows into technology funds. However, on Thursday and Friday last week, Nvidia's stock fell 6.7% from its high point, with a market value shrinkage of more than $200 billion.

For investors who tend to focus on discounted cash flow models, the gap between performance estimates and actual results is obviously creating problems.

According to compiled data in the industry, analysts' estimates of Nvidia's sales over the past five quarters have deviated from actual results by an average of 12%. This ranks third among companies in the S&P 500 index. These companies included in the predictive statistics have had an average quarterly revenue of at least $5 billion over the past five quarters and at least 20 analysts have analyzed their forecasts.

Are risks already hidden?

With the booming development of nvidia's AI chip business, its largest clients (such as microsoft) have promised to invest more funds in computing hardware in the coming quarters. The main question facing investors is what is the reasonable valuation for nvidia stocks, which have much higher growth in profits and sales than similar giant companies?

According to current estimates, NVIDIA's sales for this quarter are expected to reach US$28.4 billion, and its profit is expected to reach US$14.7 billion, an increase of 137% and 111% respectively from the same period last year. In contrast, Microsoft's sales are only expected to increase by 15%, and Apple is expected to increase by only about 3%.

Although NVIDIA's valuation multiples such as PE and P/S are high, considering NVIDIA's high growth, especially considering its previous performance was undervalued, these valuation multiples do not seem unreasonable.

But Michael O'Rourke, Chief Market Strategist at Jonestrading, believes that what is even more worrying is that since NVIDIA is a large company, the degree to which it exceeds Wall Street's growth expectations will soon begin to weaken. This may make it even more difficult for its stock price to justify itself in the future.

O'Rourke said, "This is where the risk is. You are paying a high price for a company with a large market cap, and the degree to which its future performance exceeds expectations may begin to decline, and this situation is likely to continue."

Editor/tolk