MW One reason Nvidia looks like a bargain stock following the DeepSeek news
By Philip van Doorn
Other technology stocks trading at relatively low valuations to historical levels include Micron, Super Micro and Workday
Following Monday's 17% decline in Nvidia Corp.'s stock and a 3% decline in the Nasdaq Composite Index, investors and traders might be wondering if it is time to begin scooping up stocks.
The news that DeepSeek was able to develop generative AI technology for far less money than OpenAI spent on ChatGPT has investors concerned that the hardware build-out that enabled Nvidia's stunning growth in revenue and profit may slow down. But we are at a very early stage in the reaction and analysis of the DeepSeek news.
Read: Does DeepSeek spell doomsday for Nvidia and other AI stocks? Here's what to know.
Screening IT stocks after Monday's drop
Following Monday's plunge for Nvidia $(NVDA)$ and the day's 5.6% decline for the S&P 500 information-technology sector, it might be useful to see how Nvidia's price-to-earnings ratio compares with its three-year average valuation.
Investors usually look at forward price-to-earnings ratios for stocks. These are current share prices divided by consensus estimates for earnings per share for the next 12 months.
But since we don't know if a cycle of EPS estimate cuts may lie ahead, we have looked at trailing price ratios for the S&P 500 information technology sector. These are current prices divided by reported EPS for the past 12 months, time-weighted by FactSet to account for differences in fiscal reporting periods.
We cannot know how much, if at all, the DeepSeek news will change companies' plans for AI infrastructure spending. So far, this infrastructure has been dominated by Nvidia's graphics processing units (GPU). But at least we will be looking at valuations based on actual results, rather than estimates.
Therese Poletti: DeepSeek could represent Nvidia CEO Jensen Huang's worst nightmare
There are 68 stocks in the S&P 500 information technology sector. We compared their trailing P/E ratios at Monday's close to their three-year average valuations.
These 10 companies in the S&P 500 IT sector traded lowest to their three-year average trailing P/E valuations following Monday's broad decline. Numbers for the IT sector and the full S&P 500 SPX are at the bottom of the table.
XX: SP500.45 Ticker Trailing P/E to three-year average Trailing P/E 3-year average trailing P/E Three-year estimated EPS CAGR through calendar 2024 Jan. 27 price change First Solar Inc. FSLR 9% 12.0 125.9 44.3% -2.3% Seagate Technology Holdings PLC STX 23% 21.4 92.9 -18.1% -4.4% Micron Technology Inc. MU 36% 24.9 69.0 -22.7% -11.7% Western Digital Corp. WDC 42% 17.1 41.2 -20.4% -4.5% Super Micro Computer Inc. SMCI 58% 11.3 19.6 120.4% -12.6% Enphase Energy Inc. ENPH 63% 27.9 44.0 29.0% 0.9% Nvidia Corp. NVDA 73% 40.3 54.9 97.6% -17.0% Adobe Inc. ADBE 78% 23.4 30.2 22.8% 0.7% Workday Inc. Class A WDAY 82% 36.9 45.3 325.3% 2.3% CrowdStrike Holdings Inc. Class A CRWD 83% 100.0 120.6 N/A -0.3% S&P 500 Information Technology XX:SP500.45 130% 42.2 32.36 9.5% -5.6% S&P 500 SPX 125% 28.7 22.90 5.6% -1.5% Source: FactSet
You might need to scroll the table to see all of the columns.
The table also includes estimated three-year compound annual growth rates (CAGR) for the companies' earnings per share. This figure is "N/A" for CrowdStrike Holdings $(CRWD)$ because the company's EPS for calendar 2021 was negative, according to FactSet's data.
Nvidia's trailing P/E at Monday's close was 40.3, which was high compared with the valuations for the IT sector and the full S&P 500 at the bottom of the table. But Nvidia's trailing P/E was only 73% of its three-year average valuation. And you can see in the table that Nvidia's estimated three-year EPS CAGR through calendar 2024 has been 97.6%, compared with EPS growth rates of 9.5% for the IT sector and 5.6% for the full S&P 500.
So Nvidia has commanded a premium valuation because of its rapid growth rate, and that valuation now appears to be low.
The question for investors now is whether Nvidia really is a bargain right now, or if the DeepSeek developments will change the AI build-out narrative.
Any stock screen is only a snapshot. Before buying any individual stock, you should do your own research to form your own opinion about a company's business and the likelihood of remaining competitive over the long term. One way to begin that process is to click the tickers for more information.
Read: Tomi Kilgore's guide to the wealth of information available on the MarketWatch quote page
Don't miss: 20 value stocks primed for rapid revenue growth
-Philip van Doorn
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January 28, 2025 09:32 ET (14:32 GMT)
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