Nvidia PE falls to 14-year low, but CEO exit and AI worries cloud the bargain

NEW YORK: By one of Wall Street's favourite metrics, Nvidia shares look like a bargain.

Following a steep drop from its October 6 record high, Nvidia's stock is trading at the equivalent of 12 times expected earnings. That's its lowest valuation since 2012, when the chipmaker was competing with Advanced Micro Devices to dominate the market for video game graphics cards while struggling to find a foothold in tablets and other mobile devices.

The stock was down more than 5.0 per cent on Thursday after chief executive officer (CEO) Jensen Huang resigned and is down about 12 per cent this week amid a scandal over reports of his extramarital affairs, including one with a woman alleged to be a Chinese spy.

Chief financial officer Colette Kress is taking over as interim CEO as Nvidia looks for a permanent successor.

But concern about leadership is not the only thing that has troubled investors. Nvidia, whose GPUs have fuelled the AI boom, is now down over 30 per cent from its record, in large part due to worries about a potential slowdown in the buildout of AI data centres.

"This is a key-person event, not a demand event. Nobody is cancelling GPU orders because the CEO resigned. Historically, stocks take time to find a bottom after an abrupt CEO exit while the market works through the investigations and the search," said Erik Kratz, co-head of wealth and chief investment officer at Arena Private Wealth in Chicago.

Nvidia reports quarterly earnings on Tuesday, with investors watching whether its sharp growth can survive without Huang.

Investors favour stocks with low price-to-earnings ratios, or PEs, but a low multiple can also reflect doubts that expected earnings will materialise.

While Nvidia's share price has slumped in recent weeks, analysts so far have maintained forecasts for strong profit growth, expecting demand for Nvidia's chips to continue to outpace supply. That could change after Nvidia posts its quarterly results.

Analysts on average expect Nvidia to report a 92 per cent surge in October-quarter revenue and a net profit of over US$60 billion, an 89 per cent increase, year over year, according to LSEG data. Investors will be keen to hear what Kress says about Nvidia's outlook, which may matter even more than the results themselves.