The Nasdaq has wobbled, and Nvidia (NASDAQ: NVDA) stock is down 7% since its all-time high set earlier in August.
Analysts are increasingly pointing to a split in the US stock market. There are high-flying AI-driven tech stocks. Then there’s all the rest, which observers have described as muddling along.
Is change coming? Reuters reported Friday (22 August) that Nvidia has told companies contributing to its H20 chips — designed for the Chinese market — to suspend production. We don’t know why yet.
Turning point
Some signs suggest, at least to me, that we could be approaching a pivot point for AI technology.
Data analytics and AI software specialist Palantir Technologies has fallen nearly 20% since an all-time high on 12 August. The tumble happened despite quarterly revenue reaching over a billion dollars for the first time ever earlier in the month.
Why did so many investors sell after such an apparently cracking performance? A look at the stock valuation might give us a clue. The forward 2025 price-to-earnings (P/E) ratio is up at 360, with the price-to-book ratio (P/B) at 54. To put those into some sort of perspective… yikes!
Traditionally, investors often consider a P/B of over three indicating growth potential… or overvaluation. And after the US stock market surge this year, the S&P average P/E is high by historical standards. But it’s still under 30.
Are they worth it?
I’m not saying Palantir isn’t worth its valuation. I haven’t dug into it enough to judge. And we’ve seen higher ones from other tech stocks that have gone on to huge long-term profits. But the feeling that investors are piling into anything AI-linked is one I just can’t escape.
What does valuation say about Nvidia? For 2025, there’s a P/E of 42 and P/B of 29 — falling to 26 and 11.5, respectively, based on 2027 forecasts. That’s still hot by average market standards. But for a leading company in an emerging and fast-growing tech sector, I don’t see it as too stretched. And I never thought I’d say that about a company valued at over $4trn.
There’s still massive uncertainty. And I see the biggest danger coming from China. Chinese semiconductor development is top-drawer these days. And a wave of new and potentially cheaper AI chips might even snatch global leadership from under the noses of US developers.
Shakeout?
I just can’t shake off the fear of a shakeout, with some of today’s top companies going on to lead the next wave — but some just not making it. It happened with aviation in the early part of the 20th century, and with dotcom companies at the start of the 21st.
And if we should hear the sound of a bubble bursting, the good could fall along with the not-so-good.
Still, I see a very good chance that Nvidia could come out still up among the leaders, even if the stock might suffer a correction. And I reckon those who think so could do well to consider buying even now rather than trying to time any short-term price moves.
