Nvidia, AMD, and Intel – price-to-sales surprise

Nvidia’s price-to-sales (P/S) ratio is by far the highest for a company of its size, raising questions about its valuation.

The price-to-sales ratio shows how much investors are willing to pay per dollar of sales for a company’s stock.

The ratio is calculated by dividing the stock price by the underlying company’s sales per share.

Nvidia currently has $26 billion in sales with a P/S ratio of around 38 times. In comparison, other companies with a $1 trillion valuation, like Microsoft, Apple, Google, and Amazon, have sales that range between $208 billion and $525 billion.

Peter Mallouk, CEO of Creative Planning, said the market has never before seen a P/S ratio that high for a company of its size.

The high ratio comes on the back of a 175% increase in the Nvidia share price in 2023 – from $143 per share to over $400 per share at its peak.

The main reason for its rapid increase is the growth of artificial intelligence (AI) and the hype around new technologies like ChatGPT.

Nvidia’s AI-centric data centre unit is set to benefit from the new AI wave, which excites investors about its growth path.

CFRA Research analyst Angelo Zino described Nvidia as “the most important company on the planet” because of its edge in AI.

However, whether the AI wave will be big enough to stimulate the exceptional growth baked into the share price is uncertain.

As a reality check, one can look at other chip makers like AMD and Intel, which are trading at much lower P/S ratios.

AMD’s share price increased 84% year-to-date and currently trades at a P/S ratio of 8.29.

Intel’s share price increased 17% in 2023 and has a P/S ratio of 2.29. It has been the black sheep of the chip manufacturers in recent years, which explains its low valuation.

Nvidia appears overvalued compared to AMD and Intel when considering metrics like price-to-sales and the price-to-book value ratios.

Nvidia is undoubtedly perfectly positioned to benefit from the boom in generative artificial intelligence.

However, whether it will be enough to justify its exceptionally high revenue and earnings expectations is unlikely.

The table below shows Nvidia, AMD, and Intel’s price-to-sales and price-to-book value ratios: