Performance skyrocketing, valuation retreat: When NVIDIA(NVDA.US) is regarded as a value stock, where does the incremental capital come from?

CNBC Finance APP has noted that NVIDIA (NVDA.US) announced quarterly earnings that far exceeded expectations on Wednesday, making it one of the most promising stocks for growth in the market. However, why does its trading price look like a value stock?

The chip giant’s stock price fell 5.5% on Thursday, marking its largest single-day decline since April 16, and dragging the S&P 500 index lower. Currently, the stock trades at about 22 times its expected earnings, well below its five-year average of 37 times, and only slightly above the average valuation multiple of the S&P 500.

Since analysts raised their earnings forecasts based on NVIDIA’s first-quarter revenue expectation of $78 billion—far surpassing Wall Street’s previous consensus of around $73 billion—this price-to-earnings ratio is expected to decline further.

“There’s some disconnect between such strong earnings and the weak stock performance,” said Rob Pavlik, senior portfolio manager at Dakota Wealth Management, which holds NVIDIA shares. “Of course, you’d think it would perform well after such a report. The company has shown very strong growth.”

Data shows that NVIDIA’s current P/E ratio is cheaper than about one-third of stocks in the S&P 500, but its 65% revenue growth over the past 12 months ranks third within the index. In comparison, Palantir’s revenue expansion ranks fourth in the S&P 500, yet its stock trades at approximately 98 times expected earnings.

NVIDIA’s sales growth is not enough to justify its premium valuation

The reason behind this chip manufacturer’s performance diverging from its stock price is that investors are no longer focusing on its financial data. Instead, Wall Street is worried that the hundreds of billions of dollars promised by AI developers like Meta, Alphabet, Microsoft, and Amazon will have to be cut back. If that happens, it could severely impact NVIDIA’s revenue.

Daniel Pilling, portfolio manager at Sands Capital Management, said, “This sell-off is entirely because the market is basically asking: Is this the peak?” “This sentiment has also seeped into valuation multiples.”

Before NVIDIA’s earnings report, the market was already uneasy about the AI sector due to concerns over the returns on massive expenditures and the disruptive threats posed by the technology, which had previously led to declines in software makers and other companies’ stock prices.

Paul Nolt, market strategist and senior wealth manager at Murphy & Sylvest Wealth Management, said, “It’s a bit of a double-edged sword for NVIDIA. Whatever earnings they report, it’s almost irrelevant,” adding, “Ultimately, when will we see a clear path to profit from all this capital expenditure?”

Another question remains: how much upside is left for a stock that has surged nearly 1,000% since ChatGPT was released in November 2022?

Jay Goldberg, senior analyst at Seaport Group, said, “Where is the next incremental buyer? All the major shareholders and long-only funds have already bought as much as they can—up to their limit,” and he is the only analyst to give the stock a “sell” rating. “So even if it looks cheap, no one can really step in to buy the dip.”

Of course, Wall Street remains very optimistic about NVIDIA, as many market professionals believe the current trading multiple is among the lowest since the “tariff panic sell-off” in April last year, making it highly attractive. As investors sell off large tech stocks and shift into sectors considered less risky, the stock has been trading within a narrow range.

“NVIDIA does look like a value investment opportunity,” said Tajas Desai, research analyst at Global X. “The stock price is being punished by position adjustments and sector rotations, not by deteriorating demand.”

The combination of expected growth and value may suggest that investors should view NVIDIA as a “growth at a reasonable price” option, a common strategy on Wall Street.

“These results indicate that at this valuation multiple, the stock offers very good value and opportunity,” Pavlik from Dakota said. “When you look at fundamentals, valuation, and key indicators, all of them loudly signal: this is a great target that should be part of your portfolio.”

Although NVIDIA’s current P/E ratio may not fully align with other high-growth companies, Pilling from Sands Capital is reluctant to see it as a value stock because it doesn’t behave like one.

“It doesn’t trade like a value stock,” he said. “Its volatility is much higher.”

Software stocks finally recover some ground

Data shows that an ETF tracking the US software industry is expected to outperform the Philadelphia Semiconductor Index for the first time since mid-December. On Thursday, as investors rotated out of NVIDIA and companies providing AI infrastructure, software stocks regained some ground.

Earlier this week, Anthropic announced a series of partnership agreements with software and data service providers, providing some relief to this battered sector.