has been on top of the world in recent years, riding high on the wave of artificial intelligence. Yet in terms of profitability, it isn’t the best performer in the S&P 500.
Nvidia’s triple-digit rally, which has made it one of the most important stocks in the market capitalization-weighted
is behind much of the market’s surge this year.  That has understandably made some investors nervous.
Gains by other tech stocks have shown that the rally doesn’t entirely hang on Nvidia’s performance, but that hasn’t quashed concern that optimism about AI is out of hand.
Bulls say that the proof is in the pudding. Nvidia’s earnings per share nearly quadrupled to $1.30 in its most recently completed fiscal year, and estimates have EPS more than doubling in the current fiscal 2025.
The flip side of that is that such explosive growth can’t last forever. Skeptics are concerned that AI enthusiasm has gotten carried away, and that it will be painful for the market to adapt to a more moderate growth rate. Yet by at least one measure, Nvidia’s profitability has room to expand: net income margin.
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Net income margin, which is calculated by dividing net income by revenue, shows how much money a company is making from its sales. A firm that is slashing prices to move merchandise isn’t using a sustainable model, which will be evident from how little of its revenue translates into profits.
At 48.8%, Nvidia’s net income margin is only the fifth-highest in the S&P 500. Real estate investment trust
tops the list, with a net income margin of 69.6%, followed by exchange operator
at 57.9%, and internet infrastructure and domain name registry
with 54.8%.
comes in just ahead of Nvidia, with a net income margin of 52%.
It is worth noting that the next fairly large tech firm on the list is
Broadcom
,
in twelfth place with a net income margin of 39.3%, so in that sense, Nvidia has already surpassed many of its peers.
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Nonetheless, Nvidia’s current net interest margin isn’t in uncharted territory. It could conceivably increase over time, particularly as AI ramps up. Betting against the chip manufacturer breaking barriers hasn’t panned out in the past.
Write to Teresa Rivas at teresa.rivas@barrons.com
