In midday trading on Thursday, Tesla (ticker: TSLA) stock experienced a decline. The primary factor behind this downward trend seems to be the impressive quarterly results reported by Nvidia (NVDA). Analyzing the relationship between these two companies provides investors with insights into their respective value and pricing.
Nvidia’s fiscal second quarter was nothing short of exceptional. With sales totaling $13.5 billion, the company outperformed its own projected guidance of approximately $11 billion. Looking ahead, Nvidia anticipates generating around $16 billion in sales during the third quarter, surpassing Wall Street’s estimated figure of $12 billion.
While Nvidia’s stock rose by 2.8%, the S&P 500 and Nasdaq Composite experienced declines of 0.6% and 1% respectively. In contrast, Tesla stock fell by 1.8%.
Despite being an AI industry favorite, Nvidia’s stock prices haven’t seen a significant surge primarily because its value had already skyrocketed by over 220% this year prior to Thursday’s trading session.
The notable outcome of Nvidia’s outstanding quarterly performance coupled with minimal movement in its stock is that the company’s shares are considerably more affordable on Thursday than they were on Wednesday. Currently, Nvidia stock is trading at approximately 30 times the estimated earnings for the calendar year 2024. The previous day, the stock was trading at a multiple closer to 40 times earnings. According to FactSet, earnings per share estimates have now increased to about $16.68 from around $11.50 prior to the second-quarter report.
Tesla stock, on the other hand, is currently trading at about 50 times the estimated earnings per share for 2024, which stands at $4.78. Tesla’s earnings estimates have remained unchanged from Wednesday. Consequently, despite no significant changes occurring within Tesla itself, the stock now appears much more expensive.
Aswath Damodaran, a professor at New York University, emphasizes that while pricing is relative, investing is not. In terms of price determination, the focus lies on purchasing assets that are cheap relative to similar offerings. Conversely, investing involves valuing assets based on their potential to generate cash flows and making purchases only when the price is lower than the assessed value, regardless of what others pay.
Traders and Investors in Stock Markets
Traders and investors play distinct roles in the stock markets, each with their own unique time horizon. Traders, known for their shorter-term approach, and investors, who take a longer-term view, both contribute to the daily fluctuations of stock prices through their buying and selling activities.
As a growth investor, Black relies on relative valuation metrics to assess the intersection of price and value. One such metric is the price-to-earnings-to-growth (PEG) ratio, which divides a company’s price-to-earnings (PE) ratio by its earnings growth rate. The PEG ratio for the S&P 500 currently stands at approximately 2. On average, the market trades at 18 times earnings, with an expected earnings growth rate of around 9%.
Black points out that Nvidia’s PEG ratio is approximately 1.2 times, while Tesla’s is at 1.3 times. He considers these ratios to be “too cheap” when compared to Apple, which trades at around 3 times, and Microsoft, which has a PEG ratio of about 2 times.
Despite Black’s perspective, Nvidia’s declining valuation has been putting downward pressure on other major tech stocks. Apple shares dropped by 1.6%, while Microsoft fell by 1.4%.
Although this observation is based on a single day of trading, Wedbush analyst Dan Ives believes it marks the beginning of a new era for tech stocks and disruptive technologies, with Nvidia and Microsoft leading the way. Ives predicts a “valuation upward movement to the broader tech sector in 2024.”
Ives, along with the Wedbush tech team, rates shares of Apple, Microsoft, Tesla, and Nvidia as Buy. They view the price of these stocks as undervalued relative to their intrinsic value.