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…
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