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The rise in Nvidia (NVDA) shares on Thursday was incredible: Not only was it one of the largest single-day gains in market value ever, but after a 25% surge the chipmaker’s stock was actually cheaper than the day before. Consider: On Wednesday, the price-to-earnings ratio for Club holding Nvidia was 66.1 based on full-year 2024 estimates, and 49.1 based on 2025 projections. On Friday, the forward P/E for this year was 52.9 and just 39.4 for next year. Sound a bit off? Here’s how this happens. As you can see in the chart below, the metrics on which Nvidia is being valued — in this case forward earnings estimates — were revised on a percentage basis by a magnitude significantly greater than the percentage gain in the stock price. As a result, the valuation, which is simply price divided by the forward estimates, declined materially. When we say Nvidia has historically proven cheaper than it appears, this is what we mean: Analysts consistently underestimate the true earnings power of the company and then play catch-up with their estimates. (Note: This only occurs on forward P/Es, since actual past results obviously don’t get revised on new guidance.) To better understand the importance of considering a stock move in relation to estimate revisions, let’s compare the Nvidia move this week to that of former Club holding Marvell Technology (MRVL), a great company we returned to our Bullpen shortly after exiting it in 2022. Marvell shares soared 28% on Friday after the semiconductor company reported an earnings beat Thursday after the bell. Management also raised its forward guidance. However, that big gain is outpacing the magnitude of the earnings revisions from analysts. For this reason, the valuation of MRVL shares is actually higher on Friday than it was on Thursday, indicating a less favorable risk-reward ratio. Neither example is meant as a recommendation to buy or sell shares; we currently maintain a 2 rating on shares of NVDA, meaning we’d wait for a pullback to buy more. It’s just to illustrate the importance of considering valuation when making investment decisions. As the Oracle of Omaha Warren Buffett once said: “Price is what you pay, value is what you get.” We could knock analysts for being overly conservative, which is a reason we have long held Nvidia despite what at times seem like sky-high valuations. But the update we got from Nvidia management this week shows Nvidia is actually a better value Friday than it was a week ago. You could argue it was an even better value at $300 since the estimates were wrong, but that’s a hindsight bias as you had no way of knowing that Nvidia was going to guide as strongly as it did. Analysts are paid a lot of money to come up with these estimates and aren’t always correct, but the strength of demand for Nvidia’s products for artificial intelligence caught even the best analysts on Wall Street off guard. As Wedbush Securities analyst Matt Bryson said in a note to clients this week, “Off the top of my head, I can’t remember a semiconductor/hardware company as big as NVDA (multiple billions in sales) ever surprising with a guide this much higher vs. expectations in my 20 years covering technology stocks,” adding that, “the magnitude of the beat on the guide almost makes what would have been an otherwise impressive beat on the quarter look pedestrian:” We happen to agree. (Jim Cramer’s Charitable Trust is long NVDA. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
The rise in Nvidia (NVDA) shares on Thursday was incredible: Not only was it one of the largest single-day gains in market value ever, but after a 25% surge the chipmaker’s stock was actually cheaper than the day before.
Consider: On Wednesday, the price-to-earnings ratio for Club holding Nvidia was 66.1 based on full-year 2024 estimates, and 49.1 based on 2025 projections. On Friday, the forward P/E for this year was 52.9 and just 39.4 for next year.
Sound a bit off? Here’s how this happens.
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