A Bloomberg report on the 22nd noted that Nvidia’s forward price-to-earnings (P/E) ratio—based on earnings projections for the next 12 months—has fallen below 17x, nearing a 10-year low. This could serve as a major warning sign regarding the ability of chipmakers to sustain strong profit growth.
Nvidia’s current P/E ratio is half of what it was projected to be for 2025 and represents a significant drop from the multiple of over 25x seen in May of this year. TCW senior portfolio manager Bret Horton stated, “The sharp de-rating of the stock suggests investors are skeptical about the sustainability of the company’s current earnings power. Given Nvidia’s exceptionally strong fundamentals, the stock’s performance is surprising, yet it also indicates that market expectations for the company are lower than the analyst consensus.”
As of the close on the 21st, Nvidia’s stock had risen for five consecutive days, yet its P/E ratio remained low. Semiconductor stocks, including Nvidia, had previously suffered steep declines after leaders in the artificial intelligence (AI) industry called for slowing the development of advanced AI models, though they have recently staged a rebound.
The Philadelphia Semiconductor Index surged 4.3% on the 21st—its largest gain since August 4—driven by reports of early success with Meta Platforms’ new AI agents, which boosted investor optimism regarding chip demand.
Despite significant investor anxiety regarding the outlook for AI computing power, there are no signs that investment in AI infrastructure will slow down in the near term.
Analysts project that Nvidia’s revenue and net income for fiscal year 2027 (ending next January) will grow by 90% and 99%, respectively—a substantial increase over the 65% growth rate recorded in the previous fiscal year. When releasing its second-quarter earnings in August, Nvidia forecast a 70% increase in sales for fiscal year 2028, far exceeding its initial estimate of 45%.
Nvidia’s stock has risen 22% year-to-date; while this trails slightly behind the 25% gain seen by Apple—one of the “Magnificent Seven” tech giants—it lags significantly behind other semiconductor manufacturing stocks. The PHLX Semiconductor Sector Index (SOX) has risen nearly 76% this year, with shares of Micron, Intel, and AMD all surging more than 180%; among the index’s 30 constituents, Nvidia ranks fifth from the bottom in terms of gains, while the average estimated price-to-earnings (P/E) ratio for the index’s components stands at 20 times.
The disconnect between Nvidia’s fundamentals and its P/E ratio has prompted CEO Jensen Huang to declare his company “the world’s first and only growth-value stock.” Speaking at a Goldman Sachs technology conference in early September, he stated that Nvidia is “incredibly misunderstood,” emphasizing, “We aren’t just growing; we are also capturing more.”
Part of the reason for Nvidia’s lackluster share price performance lies in pressure on profitability, largely driven by the rising costs of key components, such as memory chips. While Nvidia’s gross margin remained a robust 75% in the second quarter, a Bloomberg survey indicates that analysts’ average margin forecast for the fourth quarter has dropped to 72%, even though a rebound is expected in subsequent quarters.
Russell, Head of Global Market Strategy for Institutional Services at TradeStation, noted that Nvidia’s gross margin outlook is a key factor weighing on the stock price. He anticipates intensifying competition, particularly as some of Nvidia’s major clients develop their own AI chips; Meta Platforms has recently touted its own AI chips, and Alphabet is also developing proprietary AI chips.
Another issue facing Nvidia is that its stock price has surged more than 16-fold over the past four years, propelling it to the top spot among the world’s listed companies by market capitalization and making it a prime target within the AI market rally. Annual sales totaled $27 billion for the 2023 fiscal year (ended January 31, 2023), and are projected to reach $410 billion for the current fiscal year.