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Nvidia Is a Must-Buy. Or Is It?
The chipmaker’s high “price to sales” ratio reflects investor enthusiasm around its growth prospects. But relying on that metric created trouble during the dot-com boom.
In 2002, after the dot-com bubble burst and Sun Microsystems swooned, the company’s co-founder Scott McNealy highlighted the folly of Wall Street analysts who favored one particular financial metric to gauge a stock’s worth: its price relative to the company’s sales.
Mr. McNealy was musing about the “price to sales” ratio — an important measure of a company’s value relative to how much cash it generates. A high ratio can be justified if investors think a company has room to grow; a low ratio typically signals that investors think the company is accurately valued.
Using that metric, analysts had gambled that Sun’s stock was undervalued even when it was trading at more than 10 times its revenue — a value the business couldn’t ultimately sustain. Even if Sun passed every dollar it was making at the time on to investors, it would have taken shareholders a decade to recover their investment.
“Do you realize how ridiculous those basic assumptions are?” Mr. McNealy told Businessweek. “You don’t need any transparency. You don’t need any footnotes. What were you thinking?”
The current stock market is evoking similar sentiment among some investors, led by the giant chipmaker Nvidia, the poster child of the exuberance around artificial intelligence. On Thursday, Nvidia’s stock price rose to almost 32 times its sales.
Stock Price Ratio Steadily Rises
![](https://static01.nytimes.com/newsgraphics/2024-02-21-stock-valuation/9adabf1e-fe3f-4239-8058-3253cd109a10/_assets/stock-valuation-335.png)
3.5
-to-1
3.0
Price-to-sales
ratio
2.5
2.0
1.5
1.0
0.5
0
2000
2005
2010
2015
2020
2024
Current S&P 500 valuations
Price-to-
earnings
ratio
Price-to-
sales ratio
Market
value
Sector
Real estate
38.8
6.5
$1.0
trillion
Information
technology
36.7
7.9
12.3
Health care
29.4
1.8
5.4
Consumer
discretionary
28.8
2.3
4.4
S&P 500
24.7
2.6
41.8
Industrials
24.7
2.3
3.6
Materials
23.0
2.1
1.0
Comm.
services
22.5
3.4
3.8
Consumer
staples
21.5
1.3
2.5
Utilities
19.5
2.2
0.9
Financials
16.2
2.3
5.4
Energy
11.1
1.2
1.6
![](https://static01.nytimes.com/newsgraphics/2024-02-21-stock-valuation/9adabf1e-fe3f-4239-8058-3253cd109a10/_assets/stock-valuation-600.png)
3.5
-to-1
3.0
2.5
Price-to-sales
ratio
2.0
1.5
1.0
0.5
0
2000
2005
2010
2015
2020
2024
Current S&P 500 valuations
Sector
Price-to-earnings
ratio
Price-to-sales
ratio
Market
value
Real estate
38.8
6.5
$1.0
trillion
Information technology
36.7
7.9
12.3
Health care
29.4
1.8
5.4
Consumer discretionary
28.8
2.3
4.4
S&P 500
24.7
2.6
41.8
Industrials
24.7
2.3
3.6
Materials
23.0
2.1
1.0
Communication services
22.5
3.4
3.8
Consumer staples
21.5
1.3
2.5
Utilities
19.5
2.2
0.9
Financials
16.2
2.3
5.4
Energy
11.1
1.2
1.6
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