3 things that could dash the Nvidia share price rally

Jon Smith doesn’t dispute the strong recovery in the Nvidia share price recently, but flags up several points that investors should watch for.

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Image source: NVIDIA

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The Nvidia (NASDAQ:NVDA) share price has been on one of the craziest rallies I’ve ever seen. It’s up 194% in the past year, but in a remarkably controlled way. Most days it seems the stock’s up another one or two percent. Of course, nothing lasts forever, so I thought it wise to flag up a few points that I think could eventually cause a healthy correction lower.

The high watermark

In recent quarterly results, Nvidia has managed to exceed even the lofty growth expectations Wall Street analysts had forecasted. This is a quite remarkable feat, and has been a key factor in helping the share price to continue to push higher.

Yet this creates a high benchmark going forward. The next quarterly results are due out in August. I’ve no doubt that as we get closer to the day, investors will be expecting another insane jump in revenue, profit and the outlook for the full year. My concern is that if these forecasts are missed, the stock could see a serious drop.

This is tough because Nvidia could post a decent set of financial results. Yet if it doesn’t meet the lofty expectations, the stock could still fall.

Snapping at its heels

Another factor is increased competition. For a while now, Nvidia has been lightyears ahead of competitors like Intel and AMD. However, history tells us that early leaders do get caught up by the rest of the pack. This was the case with IBM and computers a few decades ago. It looked like they would be the best forever, but then Apple and others came and gained market share.

Although I can’t pin point exactly when others will meaningfully take market share (and therefore revenue) away from Nvidia, I don’t think it’s many years away. Others in the market will have seen the surge in demand from clients for the processing units and other chips and will no doubt be investing heavily to catch up.

A market crash

Some are saying that the US equity markets are overbought and could be in a bubble. For example, the Nasdaq 100 is up a whopping 31% over the past year. For a large-cap market index, that’s a lot!

Should investors get spooked by poor economic data, a jump in inflation or a change of president, it could trigger a swift market crash.

In this case, Nvidia shares would take a hit. This is because it’s a tech stock with a valuation based on high future earnings. If those have to be revised lower, the share price would have to be lower as well.

Not all doom and gloom

Even though the stock could dip during the coming year, I only see this as a healthy correction. The company is well placed for future gains and is at the centre of the hottest sector right now.

I don’t own the stock, but if we did see a move lower, I’d use this chance to buy. From talking to my friends, I’m not the only one in this boat.

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.

Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended Advanced Micro Devices, Apple, International Business Machines, and 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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