Jim Cramer Breaks Down P/E Multiples Explaining Why NVIDIA (NVDA) Looks Cheaper Than ServiceNow

During the September 2 episode of Mad Money, Jim Cramer broke down how nominal stock prices can misrepresent reality, as he offered a direct comparison between NVIDIA Corporation (NASDAQ: NVDA ) and ServiceNow, Inc. (NASDAQ: NOW ). He said:

NVIDIA priced at $224 might seem pricier… than say ServiceNow at $136… When you divide NVIDIA's $224 stock price by $9.26 earnings estimate for this year, you get 24 times earnings. When you look at the $136 price of ServiceNow and you divide that by the $4.07 earnings estimate, you get 33.6. I know it's counterintuitive, but NVIDIA with the $224 price target, it's just much cheaper than ServiceNow at $136. If you want a more aggressive way to compare two stocks, just go out a year. NVIDIA is supposed to earn over $15 a share next year. That means it's selling for a measly 14 times next year's earnings estimates. ServiceNow, on the other hand, has a multiple of 27 times next year's earnings estimate. Much more expensive… There are anomalies. For example, what the heck is NVIDIA doing with such a low price to earnings multiple despite the phenomenal growth?... The answer is that there are many money managers who believe NVIDIA's numbers are peaking because of this circular reasoning stuff we keep hearing about. Others think it's because of a pause in spending because of political opposition to the data center. Therefore, the critics believe NVIDIA is making all these investments in its customers just to keep the balls in the air, continue to make money by paying its customers who then pay NVIDIA back. This process is called circular financing… I vehemently disagree.

NVIDIA priced at $224 might seem pricier… than say ServiceNow at $136… When you divide NVIDIA's $224 stock price by $9.26 earnings estimate for this year, you get 24 times earnings. When you look at the $136 price of ServiceNow and you divide that by the $4.07 earnings estimate, you get 33.6. I know it's counterintuitive, but NVIDIA with the $224 price target, it's just much cheaper than ServiceNow at $136.

If you want a more aggressive way to compare two stocks, just go out a year. NVIDIA is supposed to earn over $15 a share next year. That means it's selling for a measly 14 times next year's earnings estimates. ServiceNow, on the other hand, has a multiple of 27 times next year's earnings estimate. Much more expensive…

There are anomalies. For example, what the heck is NVIDIA doing with such a low price to earnings multiple despite the phenomenal growth?... The answer is that there are many money managers who believe NVIDIA's numbers are peaking because of this circular reasoning stuff we keep hearing about. Others think it's because of a pause in spending because of political opposition to the data center. Therefore, the critics believe NVIDIA is making all these investments in its customers just to keep the balls in the air, continue to make money by paying its customers who then pay NVIDIA back. This process is called circular financing… I vehemently disagree.

Hardware Infrastructure Versus Enterprise Workflow Software

Both companies hold massive important positions in tech, but their actual business models operate in completely different parts of the economy. NVIDIA Corporation (NASDAQ:NVDA) builds the advanced graphics processing units and software ecosystems that power data centers and drive the physical infrastructure behind artificial intelligence. ServiceNow, Inc. (NASDAQ:NOW) provides cloud-based software that helps large businesses automate tasks, manage IT services, and streamline internal workflows. One sells accelerated-computing hardware, networking and software used in AI infrastructure, while the other offers the digital framework keeping enterprise operations organized.

Smart Money Sentiment and Short Interest

According to Insider Monkey's data, 285 hedge funds had positions in NVIDIA Corporation (NASDAQ:NVDA) in Q2, compared to 275 in the previous quarter, showing a steady expansion of institutional backing as artificial intelligence infrastructure demand scales higher. ServiceNow, Inc. (NASDAQ:NOW) stock was also accumulated by smart money, held by 115 hedge funds in Q2 compared to 108 in Q1.