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Do NVIDIA’s Earnings Justify Its High Price-to-Earnings Ratio?

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Feb. 21 2018, Updated 10:31 a.m. ET

NVDA’s PE ratio

In the preceding part of the series, we discussed how NVIDIA (NVDA) has one of the highest PE (price-to-earnings) ratios in the semiconductor industry. A PE ratio tells us the amount that investors are willing to pay per dollar of EPS (earnings per share).

Remember, long-term investors rely on the fundamental valuation of the company to know whether the current stock price fairly values the stock.

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NVIDIA’s high earnings and valuation

In NVIDIA’s case, the stock is currently trading at a forward PE ratio of 39.0x. This ratio is based on analysts’ consensus EPS estimate of $6.18 for fiscal 2019. Previously in this series, we discussed how NVIDIA has been beating the analysts’ EPS estimate by an average margin of 43.5% for the past two years.

For this reason, its PE ratio appears to be artificially inflated, because it’s based on a conservative EPS estimate. If NVIDIA maintains its trend of reporting better-than-expected earnings, the company could report an EPS of $8.86 in fiscal 2019.

If we take the revised EPS estimate and value NVIDIA’s stock, we see that it would be trading at 27x its forward EPS estimate. With a 27x forward PE ratio, NVIDIA looks fairly valued, compared with Intel’s (INTC) 12.8x and Texas Instruments’ (TXN) 20.5x.

This is just one way to justify the high PE ratio of NVIDIA. Another way to look at the company’s valuation is by looking at its future growth potential.

Continue to the next and final part of this series for our wrap-up discussion of NVIDIA.

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