Why Investors Shouldn't Be Surprised By NVIDIA Corporation's (NASDAQ:NVDA) 34% Share Price Surge

NVIDIA Corporation (NASDAQ:NVDA) shareholders are no doubt pleased to see that the share price has bounced 34% in the last month, although it is still struggling to make up recently lost ground. The last 30 days bring the annual gain to a very sharp 42%.

Since its price has surged higher, NVIDIA's price-to-earnings (or "P/E") ratio of 45.4x might make it look like a strong sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 18x and even P/E's below 10x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

We've discovered 2 warning signs about NVIDIA. View them for free.

Recent times have been advantageous for NVIDIA as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for NVIDIA

Keen to find out how analysts think NVIDIA's future stacks up against the industry? In that case, our free report is a great place to start.

How Is NVIDIA's Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like NVIDIA's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 148% last year. The latest three year period has also seen an excellent 665% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 29% per year as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 10% each year, which is noticeably less attractive.

In light of this, it's understandable that NVIDIA's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On NVIDIA's P/E

The strong share price surge has got NVIDIA's P/E rushing to great heights as well. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of NVIDIA's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 2 warning signs for NVIDIA (1 is concerning!) that you need to be mindful of.

If these risks are making you reconsider your opinion on NVIDIA, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.