Nvidia's Valuation Rollercoaster: From AI Surge to Pre-ChatGPT P/E Levels

As Nvidia's stock fell over 5% on a recent "Black Monday," notable financial indicators have caught the attention of analysts, revealing a stark valuation shift. Nvidia's current price-to-earnings ratio (P/E TTM) has descended to pre-ChatGPT levels, aligning closely with data recorded prior to the AI revolution sparked by OpenAI’s release.

YCharts reports that Nvidia's trailing P/E ratio has plummeted to approximately 36 times as of this past Monday. This contraction follows a significant 30% decrease from its peak earlier this January. Remarkably, the ratio is now even lower than it was on November 30, 2022, the date when ChatGPT was first introduced.

Ben Reitzes, Managing Director at Melius Research, has noted that Nvidia's valuation reduction is substantive, even when considering future earnings projections via the forward P/E ratio. According to Reitzes, this figure currently stands at 24 times, reflecting a 41% drop from the times of ChatGPT's market debut.

Investors should take heed as Nvidia remains a giant in its domain with stock climbing a staggering 583% since the advent of ChatGPT. The surge has been backed by robust demand for Nvidia’s GPU chips, driven by AI advancements, resulting in a 788% leap in net income from the fiscal year ending January 2023.

Reitzes suggests there is a valuation mismatch concerning Nvidia. In his Monday report, he stated that chip stocks, including Nvidia, have generally priced in most risks. Yet, optimism persists partly due to the upcoming Nvidia GPU Technology Conference, which promises significant insights and updates from the company.

During the event scheduled for March 17-21, Nvidia’s CEO Jensen Huang is expected to reiterate the sustained dynamism of the AI sector while unveiling projections extending into 2027, marking pivotal future developments.

Beyond current fluctuations, Reitzes draws parallels between Nvidia and historical patterns observed in Apple. He recalls the period following the 2008 iPhone launch, when Apple's forward P/E ratio shrank during the financial crisis but eventually restored to prior heights. Nvidia appears poised to potentially mirror such a trajectory, offering hope amid present market uncertainties.

Melius Research's current rating for Nvidia stands at "buy," with a target price of $170 per share, reflecting a notable potential upside from its current valuation.