3 reasons why Nvidia shares could crash down to earth!

Could Nvidia’s upcoming trading update send its share price still higher? Or will the NASDAQ-listed chipbuilder flounder?

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Growing demand for AI stocks has sent Nvidia‘s (NASDAQ:NVDA) share price through the roof in 2023. The firm — which makes graphics processing unit (or GPUs) — has risen 232% since 1 January.

A series of forecast-smashing updates has supercharged investor appetite for the stock. Latest financials showed revenues more than double between January and June, to $13.5bn. This was driven by an excellent performance from its Data Center unit (which produces chips for AI applications).

That said, talks of a possible ‘stock bubble’ continue to do the rounds. And so the company’s upcoming third-quarter update on 21 November will be keenly watched for signs of weakness.

Things to watch

Kyle Rodda, Senior Market Analyst at Capital.com, has identified three key things for investors to consider ahead of this week’s update.

1. Mixed results

First off, Rodda notes that “big tech earnings showed that implementing and commercialising AI technology has seen mixed results“.

Trading at Nvidia has been impressive in 2023, but the global transition to AI could be bumpy (as with any new technology). The chances of turbulence are especially high today given the weak condition of the global economy.

2. Country risks

Escalating tensions between China and the US also have the potential to throw company earnings growth off course. Trade disputes between the two countries and growing industry competition both threaten profits across the tech industry.

Rodda says that “Nvidia is proving dynamic when responding to geopolitical risks [and is] already flagging a new chip that it will be able to tailor for the Chinese market“. But any worsening Sino-American rivalry could still largely have devastating consequences on the firm’s bottom line.

3. Double ordering?

This week’s update will be especially watched for signs of so-called double ordering. Evidence of mass stockpiling by clients to sidestep potential supply chain issues could significantly undermine Nvidia’s long-term profits outlook.

Rodda notes that “while it’s unknown how widespread this is… if it is endemic, the company’s future sales could be severely undermined, especially if a significant downturn or negative shock means orders are withdrawn“.

Here’s what I’m doing now

Nvidia’s stunning share price increase this year leaves it trading on a forward price-to-earnings (P/E) ratio of 45.8 times. This sort of valuation could prompt a sell-off if even a whiff of trouble emerges.

Analyst Rodda has suggested that the company’s elevated share price “reflects a ‘best of all worlds’ scenario for the business, where the AI market grows to the full potential projected by maximalists, and Nvidia captures the dominant market share“.

Any signs to the contrary could see investor appetite sour sharply. We saw the this on Monday with rental equipment company Ashtead, whose share price slumped after it modestly trimmed its earnings forecasts. As with Nvidia, investors had grown accustomed to impressive trading updates at the FTSE 100 firm.

The US company has significant long-term potential as the technological revolution rolls on. But my concerns about a possible price bubble mean I’d rather buy other shares today.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has positions in Ashtead Group Plc. The Motley Fool UK has recommended Nvidia. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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