Nvidia's Stock Just Did Something It Hasn't Done in a Year. Here's What History Says Happens Next.
Over the last few days, the financial world has gone into a tizzy over a new start-up in the artificial intelligence (AI) realm. Chinese company DeepSeek sent shockwaves around the world after releasing a model akin to ChatGPT.
The primary reason investors are panicking is because DeepSeek claims to have trained its model on older, less sophisticated chipware from Nvidia (NASDAQ: NVDA). These claims have left investors scratching their heads, questioning if Nvidia’s newer architecture is worth the hefty price tag.
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As a result, shares of Nvidia have gone into a days-long downward spiral. Is this a buying opportunity, or could Nvidia stock be headed much lower?
Below, I’m going to analyze some interesting trends in Nvidia’s stock and make the case for what direction I think shares could be headed.
What did Nvidia stock just do?
The graph below illustrates multiple sell-offs seen in Nvidia stock in the days following DeepSeek’s arrival. Though you’d think declines of this magnitude say it all, there’s actually something pretty interesting going on in the background.
When a stock price moves, so does the value of the company. In the case of Nvidia, the company’s cratering share price has resulted in as much as $600 billion of lost market capitalization.
On the surface, this looks horrific. However, as it often is the case with investments driven by overwhelming emotions, there’s more than meets the eye.
Since Nvidia’s market cap has dropped, so, too, have its valuation multiples. As of this writing (Jan. 29), Nvidia’s forward price to earnings (P/E) multiple is 30.1.
Below, I’m going to dive into why this contraction in valuation multiples is important and what history suggests could happen next.
Image source: Getty Images.
What does history suggest will happen?
In the table below, I’ve summarized Nvidia’s forward P/E as of quarter end for the last year.
|
Category |
10/31/2023 |
1/31/2024 |
4/30/2024 |
7/31/2024 |
10/31/2024 |
Current |
|---|---|---|---|---|---|---|
|
Forward Price to Earnings (P/E) |
24.5 |
30.4 |
35.7 |
44.6 |
33.9 |
30.1 |
Data source: Yahoo! Finance.
The last time Nvidia’s forward P/E hovered around 30 was last January. This is important to note because back in January 2024, Nvidia’s market cap was $1.5 trillion — approximately half of what it is today.
Given the parity between the company’s forward P/E between now and a year ago, you might be inclined to think Nvidia stock will soar higher — as was the case throughout 2024. While such dynamics are what history suggests could happen, there is some important nuance to consider this time around.
Pay attention to this nuance
Since Nvidia’s current forward P/E multiple is in line with where it was a year ago despite the company’s market value doubling, this implies that Wall Street analysts are also expecting Nvidia’s earnings to double.
Looked at a different way, if Nvidia’s market cap had doubled, but the company’s earnings didn’t accelerate at a commensurate pace, then Nvidia’s forward P/E would have widened. This is a concept known as valuation expansion.
But as I pointed out in the intro, the DeepSeek storyline is calling into question what demand trends are going to look like for AI infrastructure — especially graphics processing units (GPU), which are Nvidia’s bread and butter.
Candidly, I would not be surprised to see some analysts begin haircutting their revenue and earnings projections for Nvidia. While this does not mean Nvidia should be seen as overvalued, I think investors need to let industry experts digest the DeepSeek news and refine their models accordingly.
In other words, Nvidia’s current forward P/E being nearly identical to where it was ago could be seen as a bit of coincidence, as earnings estimates are almost certainly going to change — thereby calling into question how relevant the forward P/E ratio is right now.
At a broader level, though, I’m confident Nvidia will remain a leader in the AI race as its GPUs should continue playing an important role in the technology’s development going forward. Just how much? That’s the billion-dollar question.
So while history may suggest Nvidia’s value could double this year, I’d think twice about that. In the long-run, I do think there’s still a lot of value to be recognized investing in Nvidia stock. I just don’t think shares are going to double again in 2025.
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Adam Spatacco has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.