Based on the WEI and DES screens below, if we were to simply compare NVDA to the broad market S&P Index using the current P/E ratio to do a relative value analysis, what would be our analysis? Since NVDA has a much lower P/E ratio than the SPX, NVDA is considered relatively cheap. Since NVDA has a much higher P/E ratio than the SPX, NVDA is considered relatively cheap. Since NVDA has a much higher P/E ratio than the SPX, NVDA is considered relatively expensive. Click to open/close each chart.
The Correct Answer and Explanation is:
Correct Answer:
Since NVDA has a much higher P/E ratio than the SPX, NVDA is considered relatively expensive.
Explanation:
The price-to-earnings (P/E) ratio is a widely used valuation metric that compares a company’s current share price to its earnings per share (EPS). It reflects how much investors are willing to pay for each dollar of a company’s earnings. In relative valuation, comparing a company’s P/E ratio to that of a benchmark—such as the S&P 500 (SPX)—helps assess whether the company is overvalued or undervalued in relation to the broader market.
If NVIDIA (NVDA) has a much higher P/E ratio than the S&P 500 Index, it suggests that investors are willing to pay a premium for NVIDIA’s earnings relative to the average company in the index. This typically implies higher expectations for future growth, innovation, or profitability. However, from a valuation perspective, it also means NVIDIA is relatively expensive compared to the broader market.
For example, if the S&P 500 has an average P/E of 25 and NVDA’s P/E is 75, NVDA is trading at three times the earnings multiple of the market. While this may be justified by NVDA’s growth in AI and semiconductor technology, the relative valuation still flags it as expensive. This doesn’t necessarily mean NVDA is a poor investment—it just reflects that investors are pricing in a strong growth outlook.
In contrast, a lower P/E ratio than the market would suggest a stock is relatively cheap, possibly due to lower growth expectations or higher risk.
Thus, based on the provided P/E comparison, NVDA’s much higher P/E ratio means it is relatively expensive when compared to the broader S&P 500 market.
