Nvidia's stock is a bargain - provided this pattern continues

By Philip van Doorn

Nvidia's stock is trading lower to expected profit than it did three years ago, before its AI-related sales exploded

Nvidia exemplifies the ideal "beat and raise" routine for a stock. As the company continues to report quarterly profits that are well above consensus expectations, analysts are raising their 12-month earnings-per-share estimates to support a higher share price.

For example, when the company last reported its financial results on Feb. 21, earnings for the fiscal quarter that ended Jan. 28 were $4.93, which was well above the consensus estimate of $4.59 among analysts polled by FactSet.

Before Nvidia reported on Feb. 21, its consensus 12-month earnings-per-share estimate among analysts polled by FactSet was $22.52. But as of Feb. 28 - only one week after the company's earnings announcement - that rolling 12-month EPS estimate had increased 12% to $25.27. The 12-month EPS estimate is now $27.19.

We don't know if Nvidia's beat-and-raise pattern will hold up as we head into the company's next earnings report on Wednesday. But it seems likely that it will post another impressive set of numbers, because it still doesn't face serious competition in the market for expensive graphics processing units, or GPUs. These large pieces of equipment are being installed by data centers to support their corporate clients' development of artificial-intelligence technology.

Earnings preview: Nvidia is seeing 'insatiable' demand, but these are the key questions

A better bargain

Now let's look at a three-year chart showing the movement of Nvidia's forward price-to-earnings ratio. This commonly used valuation metric is a company's share price divided by its rolling consensus 12-month EPS estimate:

Nvidia's current P/E ratio is 34, which is much higher than the weighted forward P/E of 20.8 for the S&P 500 SPX. Then again, the estimated compound annual growth rate for Nvidia's earnings for the three calendar years through 2023 was 84.9%, compared with 11% for the index, according to data provided by FactSet. And Nvidia's revenue CAGR for the three calendar years through 2023 was an estimated at 51.3%, compared with 17.9% for the index.

Read: Nvidia earnings are on deck, and Wall Street wonders just how big the beat could be

Screening the S&P 500 for increasing EPS estimates

Sticking with the P/E theme, we screened the S&P 500 to see which companies' stocks had performed well, and which also had the largest increases in rolling 12-month EPS estimates over the past three years.

To begin, the S&P 500's price increased 27% for three years through May 17. Among the index's components, 156 rose 28% or more during that period, excluding dividends.

Among those 156 stocks, consensus EPS estimates are available for 155 companies. Here are the 20 whose rolling 12-month consensus EPS estimates have risen the most from three years ago:

   Company                               Ticker   Three-year increase in rolling NTM EPS estimate  Three-year price change  Forward P/E  Forward P/E three years ago 
   Vistra Corp.                           VST                                              7,905%                     491%         18.8                        254.1 
   Super Micro Computer Inc.              SMCI                                               923%                   2,357%         27.1                         11.3 
   Marathon Petroleum Corp.               MPC                                                849%                     192%         10.2                         33.0 
   Nvidia Corp.                           NVDA                                               672%                     553%         34.0                         40.2 
   Marathon Oil Corp.                     MRO                                                515%                     114%          8.7                         24.9 
   Hess Corp.                             HES                                                515%                      83%         15.0                         50.6 
   Valero Energy Corp.                    VLO                                                496%                     103%         10.4                         30.5 
   First Solar Inc.                       FSLR                                               309%                     176%         12.1                         17.9 
   Targa Resources Corp.                  TRGP                                               303%                     201%         19.5                         26.1 
   EQT Corp.                              EQT                                                260%                      78%         17.8                         36.1 
   Booking Holdings Inc.                  BKNG                                               245%                      67%         19.7                         40.8 
   Halliburton Co.                        HAL                                                225%                      59%         10.6                         21.5 
   Builders FirstSource Inc.              BLDR                                               221%                     248%         12.9                         11.9 
   Phillips 66                            PSX                                                221%                      66%         11.4                         22.0 
   Axon Enterprise Inc.                   AXON                                               218%                     116%         58.0                         85.2 
   Marriott International Inc. Class A    MAR                                                215%                      70%         23.8                         44.1 
   Arista Networks Inc.                   ANET                                               209%                     293%         38.6                         30.4 
   DexCom Inc.                            DXCM                                               194%                      61%         66.6                        121.4 
   Schlumberger Ltd.                      SLB                                                191%                      43%         12.9                         26.3 
   Hilton Worldwide Holdings Inc.         HLT                                                185%                      68%         27.1                         46.0 
                                                                                                                                                     Source: FactSet 

Forward P/E ratios have declined for 17 of these 20 stocks over the past three years.

Click the tickers for more about each company, including news coverage, financials, price targets and ratings.

Click here for Tomi Kilgore's detailed guide to the wealth of information available for free on the MarketWatch quote page.

Don't miss: Apple spent $645 billion on buybacks in a decade. These companies were even more effective.

-Philip van Doorn

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05-20-24 1016ET

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