Considering that nearly half of U.S. semiconductor companies have P/S ratios below 4.2x, and P/S below 1.7x is not uncommon, NVIDIA Corporation (NASDAQ:NVDA) , with a price-to-sales (P/S) ratio of 39.2x, might seem like a stock to avoid altogether, but it would be unwise to take the P/S at face value, as there may be an explanation for why the P/S is so high.
Read our latest analysis for NVIDIA
NasdaqGS:NVDA Price to Sales Ratio vs. Industry 21 Aug 2024
How has NVIDIA been performing lately?
NVIDIA has certainly been doing well recently, with revenue growth outpacing most other companies. Many seem to expect this strong earnings performance to continue, which is driving the P/S ratio up. However, if it doesn’t, investors may be overbuying the stock.
If you want to find out what analysts are predicting going forward, check out our free report on NVIDIA.
Do earnings forecasts align with a high P/S ratio?
To justify its P/S ratio, NVIDIA would need to achieve significant growth well above the industry.
Looking back, the company saw an extraordinary 208% growth in sales last year, and the most recent three years have seen incredible growth in overall revenue, buoyed by impressive short-term growth. Therefore, let’s start by noting that the company has achieved significant revenue growth over this period.
Turning to the outlook, analysts watching the company closely are predicting that it will grow at 36% annually over the next three years, compared to just 28% growth for the rest of the industry, which is decidedly less attractive.
With this in mind, it’s not hard to see why NVIDIA’s P/S is high relative to its industry peers – shareholders, it seems, aren’t keen to part with what could be a more prosperous future.
Key Takeaways
While the price-to-sales ratio isn’t a deciding factor in whether or not to buy a stock, it is a very useful barometer for gauging earnings expectations.
When we research NVIDIA, we can see that the company’s P/S ratio remains high due to strong future earnings. Currently, shareholders are comfortable with the P/S as they are confident that future earnings will not be threatened. Unless the analysts are truly off the mark, these strong earnings forecasts should keep the stock price soaring.
Additionally, you should be aware of the 1 warning sign we’ve spotted with NVIDIA.
Of course, profitable companies with proven track records of strong earnings growth are generally safe investments, so we think you might find it useful to take a look at this free collection of other companies with reasonable P/E ratios and strong earnings growth.
Valuation is complicated, but we’re here to simplify it.
A detailed analysis including fair value estimates, potential risks, dividends, insider trading, financials and more will help determine if NVIDIA is undervalued or overvalued.
Access free analysis
Have feedback about this article? Concerns about the content? Please contact us directly or email us at editorial-team (at) simplywallst.com.
This article by Simply Wall St is of general nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology, and our articles are not intended as financial advice. It is not a recommendation to buy or sell a stock, and does not take into account your objectives or financial situation. We aim to provide long-term analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned herein.