Nvidia Corp. is the most expensive stock in the S&P 500 Index, with its shares trading for roughly 23 times the company’s projected sales over the next 12 months.

But there’s a problem with that valuation. In the age of the artificial intelligence boom, no one can figure out what the chipmaker’s revenues are actually going to be — not the Wall Street analysts covering Nvidia or Nvidia executives themselves. So how are investors supposed to calculate whether the shares are expensive or not?

For more than a year now, a surge in demand for Nvidia’s chips sparked by the frenzy surrounding AI has made a mockery of Wall Street’s quarterly financial estimates. Analysts aren’t making up numbers, they take their cues from management like they do with every other company. However, even Nvidia’s leadership is struggling to anticipate how much money the chipmaker will generate three months into the future.

Since Nvidia’s sales began exploding in its fiscal quarter that ended in April 2023, revenue has exceeded the midpoint of the company’s own forecast by an average of 13%, more than twice the average over the past decade. When Nvidia reported results in August, sales topped its projection by 23%, the biggest beat since at least 2013, according to data compiled by Bloomberg.

A representative for Nvidia declined to comment.

Ballparking Sales

Part of what makes modeling for Nvidia so difficult is that supply is the most uncertain variable when demand is booming, making the chipmaker unique, according to Brian Colello, an analyst at Morningstar, who last month raised his price target for the shares to $105 from $91. They’re currently trading at around $127.

Assuming steady improvement in Nvidia’s ability to increase supply, Colello said he adds up to $4 billion to Nvidia’s quarterly revenue to ballpark the upcoming quarter’s sales.

“I’m not the first analyst to be raising my price target or fair value or being surprised that revenues are far ahead of what we thought a year ago,” Colello said. “It’s been interesting and rewarding but certainly challenging.”

Colello isn’t the only one raising his price estimate. On Friday, Melius analyst Ben Reitzes raised his price target on Nvidia for the fifth time this year, to $160 from $125, implying a gain of 26% from Friday’s closing price.

Of course, there are plenty of traders buying Nvidia solely based on momentum. Nvidia has gained 156% this year and overtook Microsoft Corp. on Tuesday to briefly become the world’s most valuable company at $3.34 trillion. That rally helped drive a record $8.7 billion into tech funds last week through June 19, according to a Bank of America Corp.’s analysis of data from EPFR Global. Nvidia shares have since fallen 6.7%, erasing more than $200 billion in market value.

For investors inclined to stare at discounted cash flow models that have more variability than they have in the past, the gap between estimates and actual results has created a conundrum.

In the past five quarters, analyst estimates for Nvidia’s sales have deviated from actual results by an average of 12%, according to data compiled by Bloomberg. That’s the third-most among the S&P 500 companies that have posted average quarterly revenue of at least $5 billion in the last five quarters and have at least 20 analysts covering them.

What Price?

With Nvidia’s business booming and its biggest customers like Microsoft pledging to spend even more on computing hardware in coming quarters, the main question for investors is what’s a reasonable price to pay for a stock whose profit and sales growth is far superior to its megacap peers.

Based on current estimates, Nvidia is projected to deliver profit of $14.7 billion on sales of $28.4 billion in the current quarter, up 137% and 111%, respectively, from the same period a year ago. Meanwhile, Microsoft’s sales are expected to rise 15% with Apple projections sitting around 3%.

While Nvidia’s valuation multiples are rich, they look more reasonable given Nvidia’s growth, especially considering the estimates keep coming in low. To Michael O’Rourke, chief market strategist at Jonestrading, a bigger concern is that the degree to which Nvidia surpasses Wall Street’s growth expectations will soon start subsiding, just due to the company’s sheer size. That could make it harder to justify the shares’ price tag.

“That’s where the risk comes in,” O’Rourke said. “You’re paying a high price for a large market cap company where the beats have been trending lower and that’s likely to continue.”