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

In the September 2 episode of Mad Money, financial commentator Jim Cramer compared the valuation of two tech giants, NVIDIA Corporation (NVDA) and ServiceNow, Inc. (NOW). Cramer pointed out that NVIDIA's stock price of $224 might seem more expensive than ServiceNow's $136 price. However, when factoring in the earnings estimates for the year, Cramer revealed that NVIDIA's P/E multiple of 24 times earnings is lower than ServiceNow's 33.6 times earnings.

Even when looking ahead a year, NVIDIA's estimated earnings of over $15 per share result in a P/E of just 14 times, compared to ServiceNow's 27 times. This discrepancy suggests that NVIDIA appears more affordable than ServiceNow based on earnings multiples alone. Despite NVIDIA's tremendous growth, some analysts believe the lower valuation could be due to circular reasoning or a pause in spending caused by political opposition to data centers.

Cramer himself disagrees with this assessment, emphasizing that while both companies are major players in the tech industry, NVIDIA focuses on advanced graphics processing units and software for AI infrastructure, whereas ServiceNow offers cloud-based software to automate business processes. As of Q2, 285 hedge funds held positions in NVIDIA, up from 275 in the previous quarter, while ServiceNow had 115 hedge fund investors in Q2, up from 108 in Q1.

Short interest in NVIDIA is also relatively low, with only 1.23% of its shares sold short, indicating limited bearish sentiment.