Nvidia (NASDAQ:NVDA) stock has jumped 35% over the past year. This is impressive, especially considering it has a market cap in the trillions of dollars. Yet recent events and a high valuation could make it hard for the share price to continue pushing higher in the coming months. Here’s why I’m flipping to being cautious with my outlook.
Geopolitical risk
A factor that has suddenly come back in the headlines is US and China trade friction. Last Friday, President Trump threatened 100% tariffs on China. Although he softened his comments at the weekend, there are fears of further escalation. Nvidia is vulnerable here as changes in US export policy (or follow-on legislation) can restrict which chips Nvidia can sell to China.
Given the global AI race that’s ongoing, countries are keen to protect areas they see as being of national importance. This could mean the US could limit Nvidia’s reach not only to China but also to other nations around the world, if we are heading towards a broader trade war.
Even though I don’t believe we’re going to have a massive situation on our hands here, some investors panic out of fear just on the initial headlines. That’s why we could see higher volatility in Nvidia shares in coming months, even if the news turns out to be a lot of hot air.
Valuation remains high
Another concern is the valuation. Nvidia has a price-to-earnings ratio of 53.6. Even for a growth stock, this is high. Sure, it reflects very aggressive growth assumptions. But when the market prices in near-perfection, even a small downgrade in guidance or a delay in China sales can trigger a sharp correction in the share price.
The next quarterly earnings are due out in a month’s time, so we’ll have to wait and see what the results produce. But with a lofty benchmark in place, I think it makes it tricky for the report to be good enough to support a meaningful rally in the stock.
The other side of the coin
One point that could help the stock and keep it outperforming is new deals. We’ve recently had news about a $6.3bn cloud capacity deal with CoreWeave, a $1.5bn lease deal of GPU servers with Lambda and a partnership with Saudi Arabia. These are the kind of moves that keep investors excited about the future prospects for the business.
Given we’re still a way away from peak AI adoption, the scope for innovation and further lucrative deals in the sector is large. Therefore, the stock could push higher even with the geopolitical risk and high valuation if investors are happy to look beyond short-term volatility.
On balance, I still believe the stock is vulnerable in the short term, but would consider buying if we saw a sharp correction. Investors could consider doing the same.
