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Nvidia’s Key Ratios, and What They Tell Us About Its Valuation

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Nvidia’s stock outperforms market by a huge margin

Nvidia’s (NVDA) stock price has risen 192% over the past 12 months, outperforming the S&P 500 Index (SPY), which has risen 12.5% during the same time period. By comparison, Advanced Micro Devices’ (AMD) stock price rose a whopping 284% during the same period, indicating strength in the discrete GPU (graphics processing unit) market.

Nvidia’s stock outperformed the market by such a high margin because it witnessed exponential growth in its Data Center and Automotive segments and showed strong growth as well in the gaming market.

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Price-to-sales ratio

A company’s PS (price-to-sales) ratio tells us the amount that investors are willing to pay for every dollar of the company’s sales. Nvidia had a PS ratio of 8.95x on April 27, 2017—a metric way higher than Intel’s (INTC) 2.93x and AMD’s 2.96x.

Price-to-EBITDA ratio

A company’s EBIDTA (earnings before interest, tax, depreciation, and amortization) shows the outcome from its operating decisions. It removes the effect of any financial decisions in the form of interest paid on debt, the government’s decision in the form of tax rates, and accounting decisions in the form of non-cash items like depreciation and amortization.

Nvidia’s price-to-EBITDA ratio stood at 28.9x on April 27, 2017, which is way higher than Intel’s ~7.8x and AMD’s -37.8x.

Price-to-earnings ratio

A company’s PE (price-to-earnings) ratio tells us the amount investors are willing to pay for every dollar of the company’s EPS (earnings per share). It is the most widely used ratio because it’s directly linked to the profit that is attributable to shareholders. The PE ratio does not apply for a loss-making company.

Nvidia’s PE ratio stood at nearly ~40.5x on April 27, 2017—higher than Intel’s ~17.5x. AMD does not have a PE ratio because it has not yet returned to profits.

Nvidia is trading at a premium to all its price-based comparable valuations, including price-to-sales, price-earnings, and price-to-EBITDA. This shows that investors are willing to pay more for one dollar of earnings as they expect Nvidia’s earnings to grow at a steeper rate.

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