Suffering from Success: Not even NVIDIA is able to figure out what revenues will be this year

NVIDIA Corp. currently holds the title of the most expensive stock in the S&P 500 Index, with shares trading at approximately 23 times the company’s projected sales over the next year.

However, this valuation comes with significant uncertainty. In the current surge of artificial intelligence (AI) interest, even Wall Street analysts and NVIDIA executives are struggling to predict the company’s future revenues accurately.

This uncertainty makes it difficult for investors to determine if NVIDIA’s shares are overpriced.

Over the past year, the demand for NVIDIA’s chips, driven by the AI frenzy, has consistently outstripped Wall Street’s quarterly financial estimates. Analysts base their projections on guidance from NVIDIA’s management, as is standard practice, but NVIDIA’s leadership itself has found it challenging to forecast revenues just three months ahead.

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Since NVIDIA’s sales began to skyrocket in the fiscal quarter ending April 2023, the company’s revenue has exceeded its own forecasts by an average of 13 per cent, more than double the average over the past decade.

Notably, in August, NVIDIA’s sales surpassed its projections by 23 per cent, the largest margin since at least 2013, according to Bloomberg data.

Brian Colello, an analyst at Morningstar, highlights that the most uncertain variable for NVIDIA is supply, especially when demand is soaring. This unique challenge complicates revenue modelling for the chipmaker. Last month, Colello raised his price target for NVIDIA shares from $91 to $105, which are currently trading at around $127.

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He factors in up to $4 billion to NVIDIA’s quarterly revenue to estimate the upcoming quarter’s sales.

Colello acknowledges the difficulty, saying, “I’m not the first analyst to raise my price target or be surprised by revenues far ahead of what we thought a year ago,”

Colello is not alone in adjusting his estimates. On Friday, Melius analyst Ben Reitzes increased his price target on NVIDIA for the fifth time this year, from $125 to $160, suggesting a 26 per cent gain from Friday’s closing price.

Many traders are buying NVIDIA stock based purely on momentum. The stock has surged 156 per cent this year, briefly surpassing Microsoft Corp. to become the world’s most valuable company at $3.34 trillion. This rally contributed to a record $8.7 billion inflow into tech funds in one week,] according to Bank of America Corp.’s analysis of EPFR Global data. However, NVIDIA shares have since fallen 6.7 per cent, wiping out over $200 billion in market value.

For investors focused on discounted cash flow models, the discrepancy between estimates and actual results creates a significant challenge. Over the past five quarters, analysts’ estimates for NVIDIA’s sales have deviated from actual results by an average of 12 per cent, the third highest among S&P 500 companies with average quarterly revenue of at least $5 billion and coverage by at least 20 analysts.

With NVIDIA’s business booming and major customers like Microsoft planning to increase spending on computing hardware, the key question for investors is determining a reasonable price for a stock with such exceptional profit and sales growth compared to its large-cap peers. NVIDIA is projected to achieve a profit of $14.7 billion on sales of $28.4 billion in the current quarter, up 137 per cent and 111 per cent, respectively, from the same period last year. In contrast, Microsoft’s sales are expected to grow by 15 per cent, while Apple’s projections are around 3 per cent.

Despite NVIDIA’s high valuation multiples, they seem more justifiable given the company’s rapid growth, especially since estimates have consistently been low. However, Michael O’Rourke, chief market strategist at Jones Trading, cautions that as NVIDIA’s growth rate starts to stabilize due to its size, the degree to which it surpasses Wall Street’s expectations will likely diminish. This could make it harder to justify the current high price of its shares.

(With inuts from agencies)