There’s Bubble Trouble Ahead for Nvidia Stock Investors
It’s undeniable that Nvidia (NASDAQ:NVDA) is a darling of the market now. NVDA stock seems unstoppable as the company is a major supplier of hardware for generative artificial intelligence applications.
However, with so much positive news and future success already priced into the shares, cautious investors shouldn’t get too excited about Nvidia now.
Last week, I felt like a lone voice when I warned people about the “bubble trouble” with Nvidia. However, I recently discovered a couple of analysts who seem to agree with my assessment.
Ultimately, you’ll have to make your own decision, but there is a legitimate argument to be made against investing in Nvidia at its current share price.
Nearly Everybody Loves NVDA Stock
It’s great news that practically everybody likes NVDA stock, right? Not necessarily, as I firmly believe that a crowded trade usually isn’t the winning trade.
As I’m writing this, Nvidia’s GAAP trailing-12-month price-to-earnings (P/E) ratio is over 200x. Just to give you a benchmark, the sector median P/E ratio is around 25x.
Also, Nvidia’s TTM price-to-book and price-to-sales ratios are roughly 10 times the respective sector medians.
Now, Nvidia has to somehow deliver results in line with those valuations. Plus, the company has to live up to its lofty current-quarter revenue guidance of $11 billion (compared to the prior quarter’s actual result of $7.192 billion in revenue).
This won’t be impossible, but it also won’t be easy. Besides, contrarians should be on alert when they discover that options traders are placing overwhelmingly bullish bets on NVDA stock, and the cover of Barron’s literally has a picture of a bull on it.
Two Analysts Warn About Nvidia’s Valuation
I’m grateful, however, that there are at least a couple of contrarian voices on Wall Street. For instance, WealthWise Financial CEO Loreen Gilbert warned, “if you look at the forward PE of Nvidia right now trading at over 200 times, that seems like an unreasonable valuation.”
I agree 100% with this assessment.
To sustain that high valuation, Gilbert continued, “we’d have to see some catalyst for a huge surge in sales or some efficiencies in profit margins.”
Again, the theme here is that Nvidia will have to live up to investors’ sky-high assumptions and expectations.
In a similar vein, Morningstar Chief U.S. Market Strategist David Sekera characterized NVDA stock as “overvalued.” Sekera cited that fact that the stock was “currently at about a 30% premium above our $300 fair value estimate.”
Don’t get the wrong idea here. Sekera doesn’t believe that Nvidia is a bad company, and neither do I. Sekera’s point, and my point as well, is simply that “the valuation has just gotten ahead of itself at this point in time.”
This Is a Time for Caution With NVDA Stock
For overeager Nvidia bulls, now is a great time to put things into perspective. There’s nothing wrong with taking profits after a stock has more than doubled in less than six months.
It’s fine to believe in the future of AI and Nvidia. However, Nvidia will have a tough time living up to the market’s future growth expectations for the company.
At least two analysts/strategists seem to agree with me on that point. Therefore, I invite you to consider scaling back on your position in NVDA stock if you have one. And if you’re not invested in Nvidia now, there’s no urgent need to buy the shares at their current price.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
