Just a few years ago, Nvidia (NASDAQ: NVDA) was largely unknown by many. Today, the stock is the talk of the town.
Investors can’t seem to get enough of the artificial intelligence (AI) pioneer. For those who aren’t aware, it’s best known for designing and supplying graphics processing units to some of the largest businesses in the world.
The stock rose a monumental 233.2% in 2023. After that, you’d expect it to cool this year, right? Not Nvidia, though. It has gone on to climb a further 170.2% year to date.
But at $131.4 a pop, what’s next in store?
Up or down?
For it to fall to $100, it would mean a 23.9% decline. To reach $150, it would have to rise 14.2%.
While it’s impossible to definitively say how a stock could perform, if I had to predict, I think there’s more potential we see its share price fall closer to $100 before it hits $150.
Don’t believe the hype?
My worry with Nvidia is that a good chunk of investors own it solely out of FOMO (fear of missing out). It was one of the most traded stocks last year. And while that can send its share price soaring when times are good, like now, what about when growth inevitably slows down?
The reverse happens. And that could lead its share price to come tumbling down, and fast. Its sales are skyrocketing now as demand continues to exceed analysts’ expectations. But that won’t last forever. When that day comes, could it be shareholders get worried and rush to offload their shares? I reckon so.
Overvalued?
I don’t have to explain the science behind a 3,000%+ rise in five years being unsustainable. As a shareholder, it does make for pretty viewing. That said, it also sparks a high level of concern.
I think the stock is overvalued today. Its price-to-earnings (P/E) ratio, one of the most common valuation metrics, is 76.1, as seen below. That’s incredibly high.
Created with TradingView
Its forward P/E is 48.9. That’s slightly better, but it’s still expensive. For context, the S&P 500 average is around 23.
Looking at its price-to-sales ratio paints a similar picture. As seen below, it’s currently 40.5. The S&P 500 average is just 2.8.
Created with TradingView
I’m still bullish
While I think the stock is too pricey right now, that’s not to say I’m not bullish on Nvidia for the long term.
AI is a sector that will have a massive impact on the world, and Nvidia is one of the frontrunners in the space. For example, generative AI is predicted to grow at a compound annual growth rate of 42% over the next decade and be worth $1.3trn. And that’s just one corner of the industry!
In no rush
But if I didn’t own the shares, I wouldn’t be in any rush to buy some at their current price. In fact, I’m planning to sell some of my holdings in the weeks to come and reinvest the profits into stocks I think offer better value.
If Nvidia’s share price falls, only then will I consider dipping my toe in and buying some more shares.
