Nvidia stock’s (still) booming. But is the bubble about to burst?

Nvidia stock’s made a lot of investors very wealthy. But our writer suspects it might only be a matter of time before we see a big sell-off.

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Image source: NVIDIA

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Amid all the economic uncertainty and political wranglings, one shining beacon of hope for global investors has been the performance of Nvidia (NASDAQ: NVDA) stock.

As I type, the company’s value has risen 166% in 2024 alone, over 200% in the last 12 months and astonishing 3,099% in the last five years.

There’s a chance this stratospheric rise will continue. Or not.

Brief wobble?

Last month, Nvidia briefly became the world’s most valuable company. On 18 June, the valuation hit $3.4trn. In a matter of days however, it had shed over $500bn.

In the grand scheme of things, this sell-off seems to be nothing more than a temporary blip. Indeed, Nvidia’s share price quickly recovered. But it does suggest that at least some in the market believe the valuation — at around 45 times forecast earnings — is overly stretched.

The analysis doesn’t need to get that deep. Look at the share price graph for the last five years.

Without doubt, it’s a thing of beauty. It also looks pretty unsustainable to me. No stock rises in a straight line.

Crowded trade

So what might cause a bigger sell-off? It could come down to a temporary drop in demand. Nvidia might find itself in a purple patch now but what happens when its customers — who have all been hoovering up the firm’s graphics processing units (GPUs) at a frenetic pace — have more than they realistically need for now?

On its own, such an issue might not trouble the experienced investor. But I fancy there are a lot of people out there who own the stock purely out of FOMO (fear of missing out). This leads to a herd mentality — great when everyone’s happy but it also only takes a slight setback for huge numbers to get worried and sell.

And that’s before we’ve even considered any wider economic headwinds that could shake sentiment.

Long-term winner

For the avoidance of doubt, I’m definitely a believer in the Nvidia story over the long term and the investment case for artificial intelligence (AI) more generally. It’s a great company in a space that will quite literally change the world.

But I can’t say I’m itching to snap up the stock at this price. Fundamentals don’t matter until they do. And I’m inclined to think that Nvidia’s gone too far, too fast, too soon.

Will CEO Jensen Huang be bothered? Probably not. But he did sell $169m worth of shares in June.

Safety in numbers

Taking the above into account, I’m more than happy to restrict my exposure to various funds I own for now. These include FTSE 100 member Scottish Mortgage Investment Trust and Blue Whale Growth Fund. At 8.8% (according to its latest factsheet), the company’s the largest holding in the former’s portfolio.

While not owning the shares directly does mean I won’t do as well if the price keeps rising, the diversification I get via these investments should still allow me to sleep at night. For me, that matters a lot more than making a quick buck.

But if Nvidia’s stock were to tank 20%-30% (or more) on what I consider to be a short-term issue or a general stock market meltdown? Well, then I’d be pushing my way to the front of the queue!

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.

Paul Summers owns shares in Scottish Mortgage Investment Trust and Blue Whale Growth Fund. 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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