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Nvidia stock is trading on 'heroic' valuations amid its 2023 eruption: Strategist

Nvidia stock (NVDA) has become a Wall Street darling again, but with that love comes a whole lot of expectation.

Shares of the chip giant have exploded 115% year to date, dusting the Nasdaq Composite's seemingly paltry 20% gain. The company's stock is leading the pack among well-known chip-makers: AMD (AMD) shares are up 63% on the year, Intel (INTC) has advanced 14%, and Qualcomm (QCOM) shares have actually lost 3.6%.

The stock has even outperformed mighty Apple's (AAPL) 35% appreciation.

"Nvidia is trading on heroic valuations which time will tell if they are justified," quipped Deutsche Bank strategist Jim Reid in a client note Monday.

To Reid's point, Nvidia's valuation clearly puts the stock in priced-for-perfection territory.

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The stock trades on a forward price-to-earnings multiple of 63 times, according to Yahoo Finance data. By comparison, the S&P 500 trades on a forward price-to-earnings multiple of 18.8 times.

In effect, investors are banking on Nvidia to grow its future earnings by more than three times the rate of the S&P 500.

That's a tall order.

On a trailing 12-month basis, Nvidia's stock trades on an exorbitant 117 times enterprise value to EBITDA (earnings before interest, taxes, depreciation and amortization) multiple. Zooming in on the trailing price-to-sales ratio, investors are greeted with a lofty 27 times multiple.

Out of the 57 sell-side analysts that cover Nvidia, 77% rate the stock a buy. There are zero sell ratings on Nvidia's stock on Wall Street.

So why the major optimism on Nvidia? Look no further than what Nvidia is building on the supercomputing and AI fronts.

Microchip and Nvidia logo displayed on a phone screen are seen in this multiple exposure illustration photo taken in Krakow, Poland on April 10, 2023. (Photo by Jakub Porzycki/NurPhoto via Getty Images)
Microchip and Nvidia logo displayed on a phone screen are seen in this multiple exposure illustration photo taken in Krakow, Poland on April 10, 2023. (Photo by Jakub Porzycki/NurPhoto via Getty Images) (NurPhoto via Getty Images)

Monday brought news out of Germany, where Reuters reported the company unveiled a new supercomputer in partnership with Hewlett Packard Enterprise (HPE) at a supercomputing conference. The computer — called Isambard 3 — is based on Nvidia's new high-powered Grace CPU chips.

The Grace CPU chips take aim at similar ones offered by AMD and Intel.

Meantime, OpenAI's popular generative AI platform ChatGPT was developed using Nvidia GPUs.

And at its GTC conference in March, Nvidia showed off a host of solutions for training and deploying complex models inherent to generative AI.

“We are seeing an acceleration in demand,” Nvidia founder and CEO Jensen Huang told Yahoo Finance Live. “We’re seeing an acceleration of demand for our DGX AI supercomputers. We’re seeing an acceleration of demand for inference, because of generative AI.”

Wall Street's read is that Nvidia is a "one-stop solution provider" for all things tied to the hot generative AI movement, potentially leading to bumper profits well into the future.

"With leading silicon (GPU/DPU/Networking), hardware/software platforms, and a strong ecosystem, Nvidia is well-positioned to continue to benefit from major secular trends in AI, high-performance computing, gaming, and autonomous vehicles, in our view," JP Morgan analyst Harlan Sur wrote in a research note.

Added Sur: "Bottom line: Nvidia continues to be 1-2 steps ahead of its competitors in accelerated computing silicon/systems, software, and ecosystems."

These Nvidia bulls will be put to the test this week on two fronts.

The company's AI technology is rumored to be on display at Microsoft's (MSFT) three-day developer conference that kicks off mid-week. And earnings are out after the close of trading on Wednesday.

There is some chatter on the Street that no matter what Nvidia does this week, a pause in the stock price may be warranted due to those aforementioned heroic valuations.

Warns Bank of America analyst Vivek Arya: "Post-earnings volatility [on Nvidia] it to be expected given sky-high expectations and the stock's 97% return year to date (vs. Philadelphia Semiconductor Index up 18%)."

Brian Sozzi is Yahoo Finance's Executive Editor. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Tips on the banking crisis? Email brian.sozzi@yahoofinance.com

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