Why are Nvidia and Samsung’s P/E ratios falling?

Choy Jung-hyuk

The author is a professor of Economics, Finance and Asset Management at Hanyang Cyber University.

A similar phenomenon has emerged this year at both Nvidia and Samsung Electronics: Their projected earnings per share, or EPS, for the next 12 months have risen rapidly, while their 12-month forward price-to-earnings ratios, or P/E ratios, have continued to fall. Nvidia’s P/E ratio recently dropped to about 18, its lowest level since 2019, while Samsung’s has fallen from around 15 last year to an exceptionally low level of about 4.

This is not happening because their share prices are weak. What is causing these P/E ratios to fall is that EPS is increasing faster than share prices.

The P/E ratio is calculated by dividing a company’s share price by its EPS. Put another way, a share price can be seen as the product of earnings and the valuation the market assigns to those earnings and their growth potential. So even when a stock rises, its P/E ratio can fall if earnings rise faster.

A lower P/E ratio therefore cannot simply be interpreted as meaning that a stock has become “cheap.” Instead, it may reflect a process in which expectations previously priced into the stock are being realized as actual profits.

This distinction matters because the same low valuation can carry very different implications. When profits are rising because an anticipated expansion is becoming reality, a declining multiple can accompany genuine improvement in corporate performance. But when earnings are near a cyclical peak, the same low multiple may signal that investors doubt those profits will last. The number itself does not tell investors which explanation is correct. That requires examining the source, direction and durability of earnings growth over the coming quarters and years.

Nvidia is a prime example. Expectations for AI growth were reflected in its share price first. As actual profits subsequently surged, earnings rapidly caught up with the elevated stock price.

Samsung Electronics has a broadly similar structure. Stronger demand for AI and high bandwidth memory, or HBM, combined with an improvement in the memory chip market, has sharply increased earnings. As a result, its P/E ratio has fallen despite a rising share price.

But Samsung differs from Nvidia in one important respect. Memory semiconductors are highly cyclical, making it difficult to determine whether today’s high projected earnings can be sustained. In the past, memory booms have repeatedly been followed by falling semiconductor prices and declining profits.

If Samsung’s current earnings represent a new normal created by structural changes in the industry, its low P/E ratio could make the stock more attractive. But if the company remains within the familiar semiconductor cycle, the low ratio may instead reflect market caution over the possibility of future earnings declines.

Still, it is encouraging that Samsung’s share price gains are not being driven merely by expanding expectations. They are being supported by actual earnings growth.

What, then, should investors watch when evaluating such low P/E ratios? Above all, they need to determine whether earnings forecasts continue to rise and whether actual results support those forecasts.

If the sustainability of already elevated profits is confirmed, the market may once again assign a higher P/E ratio and revalue the company accordingly. A combination of sustained earnings and a higher valuation multiple could provide further support for the share price.

Conversely, if earnings growth begins to weaken, the stock price could fall despite a seemingly low P/E ratio. Depending on how quickly profits decline, the P/E ratio could even rise as earnings shrink, illustrating why a low multiple alone offers no guarantee of investment value.

The key question, therefore, is not simply whether the current P/E ratio looks low compared to its historic level. Investors must ask why it has fallen and whether the earnings underlying that valuation are durable.

For both Nvidia and Samsung, falling P/E ratios show that profits have been growing faster than their share prices. But whether that represents an opportunity or a warning ultimately depends on what happens to earnings from here.

In the end, a low P/E ratio should be the starting point for an investment decision, not its conclusion.