Investing

1 Factor Decides Whether NVIDIA Skyrockets the Rest of 2024

Eric Bleeker

Published: July 25, 2024 7:39 pm

After NVIDIA (Nasdaq: NVDA) sunk to $106.30 in early trading, shares battled back to as high as $116.63 before ending the day at $112.28.

Clearly, shares of NVIDIA and the rest of the Magnificent 7 are under intense selling pressure right now.

Key Points in This Article

• The dominant trend across the past two weeks has been a ‘sector rotation’ out of large technology stocks and into small caps and value stocks. The Nasdaq dropped .93% while the Russell 2000 gained 1.26%, continuing this trend.
• Prior to the current sell-off that began on July 11th, investors were paying close to 35X forward earnings for Magnificent 7 stocks like Amazon, Apple, NVIDIA, and Microsoft. They’re now paying closer to 30X for each of these stocks.
• If you’re watching stocks sell and thinking it might be time to find some of the most promising AI stocks “on sale,” you’ll want to grab a copy of our brand-new “The Next NVIDIA” report. It outlines stocks that could dominate the next major trend in AI, including a software stock we’re confident has 10X potential.

Why the Price of Magnificent 7 Stocks are Plummeting

Two primary factors have conspired to drive NVIDIA’s price down. The first is a sector rotation out of large technology stocks and toward small caps and Dow Jones Industrial components outside the technology space. Today, the Russell 2000 once again dramatically outperformed the Nasdaq. The Nasdaq closed down .93% while the Russell 2000 gained 1.26%.

Second, investors appear to be reducing risk. In days where the Nasdaq has seen its worst sell-offs in recent weeks, generally NVIDIA and Telsa (Nasdaq: TSLA) – two stocks seen as the riskiest of the group – have seen the largest losses.

One big question surrounding NVIDIA’s share price is just what forward P/E investors will continue valuing it at. Let’s dive into where NVIDIA’s forward P/E was before this sell-off, how it compares to other major technology stocks, and what NVIDIA’s share price could look like under different scenarios.

How Much Magnificent 7 Stocks Have Declined

The table below summarizes how much each Magnificent 7 stock has declined recently.

As you can see, the range for recent drops ranges from Apple‘s (Nasdaq: AAPL) 8.3% drop to Tesla and NVIDIA both exceeding a 20% drawdown from their 52-week highs.

Let’s take another look at a selection of Magnificent 7 stocks, analyzing where their forward P/E was before this sell-off started and where it stands today.

In recent articles, I’ve been banging the table that the biggest question surrounding Magnificent 7 stocks is whether the group (NVIDIA, Apple, Microsoft, and Amazon) that had begun trading in a very uniform range of about 30-35X earnings could maintain those levels.

From that perspective, the sell-off across the past two weeks hasn’t been about the business outlook worsening for NVIDIA, Apple, Microsoft, or Amazon. 

If anything, the prospects for all these companies continue to improve.

Instead, investors have shifted from paying closer to 35X forward earnings for the group down to 30X forward earnings. That shift might not sound like much, but it’s enough to shift the share price of this group of stocks down by about 15%.

The Big Question: Do Valuations Fall Further?

The big question that comes next is whether valuations fall further. Let’s use NVIDIA as an example to illustrate how its multiple can impact its price.

Today, Wall Street estimates NVIDIA will make about $3.73 in earnings per share (EPS) next year (NVIDIA’s fiscal 2026 which ends in January 2026 and covers almost all of 2025). 

If we project NVIDIA’s share price out at different multiples for 2025 earnings, we find.

• 25X 2025 Earnings: NVIDIA would be worth $93.25
• 30X 2025 Earnings: NVIDIA would be worth $111.90, which is almost exactly what they trade for today
• 35X 2025 Earnings: NVIDIA would be worth $130.55, which is about where NVIDIA traded before Fed comments on July 11th started the current sell-off
• 40X 2025 Earnings: NVIDIA would be worth $149.20

Now, here’s where this exercise gets interesting. As we’ve noted in previous articles, NVIDIA’s new Blackwell release could be powerful enough to drive next year’s EPS north of $5 per share. 

If NVIDIA were to maintain its current multiple of 30X 2025 earnings, Wall Street raising their estimates to $5 in EPS next year would lead to a share price of $150 per share. That would represent an upside of 34% from today’s closing price.

However, if NVIDIA’s multiple kept contracting, the upside scenario would look very different. Even if estimates climbed to $5 in EPS next year, if investors were only willing to pay 25X 2025 earnings, NVIDIA would only be valued at $125 per share even seeing estimates for its performance in the next year skyrocket.

What Will Drive Magnificent 7 Multiples?

Generally, when earnings estimates continue rising for a company, their multiples rise. However, the dominant trend right now is ‘sector rotation.’ That is to say, investors are moving money out of indices with Magnificent 7 stocks and towards small caps and value stocks.

That is to say, if you’re wondering where NVIDIA’s share price moves in the next six months, the big question isn’t whether they’ll continue performing (demand for their Blackwell platform looks outstanding) but rather what multiple the market will keep paying for the company.

What are the Best Opportunities in AI Today?

Investors may have sold off AI stocks, but as I just noted our bet is demand in the industry will stay red-hot in the second half of the year. If you’re seeing stocks sell-off and thinking it might be time to pick up some leading names “on sale,” then you’ll want to download a complimentary copy of our “The Next NVIDIA” report. It’s available for a limited time only, and the breakthroughs discussed inside are moving rapidly, so don’t delay getting the full story!