What happened
It's no surprise that Nvidia (NVDA 3.71%) has been very volatile over the last 18 months. The high-flying tech stock was valued way too high based on traditional metrics, and when the business stumbled, shares were cut in half last year.
But after slowly gaining much of that drop back, the stock broke out in a big way this week. By early Friday morning, the chipmaker's stock was up by more than 20% since last week's close, according to data provided by S&P Global Market Intelligence.
As a result, shares are up a resounding 162% just in 2023.
So what
The stock exploded this week after Nvidia reported its fiscal 2024 first-quarter earnings and blew away all expectations with its second-quarter guidance. The report representing the three-month period ended April 30 was excellent. It showed a recovery in gaming and record revenue from Nvidia's data center segment.
But it was what the company said about how fast artificial intelligence (AI) is boosting sales in that latter segment that has investors scrambling to buy the stock. Nvidia reported $7.2 billion in sales, when its own most recent projection was $6.5 billion. But it was the second-quarter estimate of $11 billion in sales that shocked investors. That's more than 50% higher than what analysts expected.
Image source: Getty Images.
Now what
The pace of AI adoption and Nvidia's ability to immediately monetize it are what had investors scrambling to own shares. In the company's earnings call with investors, CEO Jensen Huang said, "And what happened is when generative AI came along, it triggered a killer app for this computing platform that's been in preparation for some time."
Huang went on to explain that $1 trillion worth of data center infrastructure will have to transition existing processing units to accelerated computing chips. And Nvidia is a leader in this area.
The company's market cap vaulted up to nearly $950 billion after the stock's run this week. That puts it at an extremely high valuation based on its price-to-earnings (P/E) ratio. Even looking forward to the next fiscal year, the P/E is still at a lofty level around 50.
But investors think Nvidia will continue to surprise to the upside for an extended period, and that would make the valuation look much more reasonable in the next year or two.
