The speculative fervor around Nvidia (NASDAQ:NVDA) stock has something in common with a short squeeze. At some point it ends in tears for someone, even if the underlying trend is in their favor.
There’s no doubt that Nvidia today is priced as a bubble stock. Any stock trading at 162 times current earnings and 26 times sales is overpriced. In October, Nvidia was trading below $120. On May 11 it was at $285. That’s not the move of an investment. That’s the move of a speculation.
Nvidia is next due to report its earnings on May 24. Last quarter it delivered 65 cents per share of net income, 35% more than expected. The April quarter is expected to deliver 61 cents per share on $6 billion in revenue. Nvidia can beat those expectations.
But even if Nvidia meets expectations for all of its fiscal 2024, today’s buyers are paying 84 times those earnings and 23 times those sales. Strange that there are analysts right now recommending you buy NVDA stock today.
Have they learned nothing?
NVDA Stock: Investors Misunderstand the AI Boom
Artificial intelligence has been around for years. What’s new is seeing output in forms people are familiar with like stories, art, music or reams of computer code.
The boom in this “generative AI” is real. But there’s more going on under the surface in the Machine Internet. Making cities, hospitals and factories more fully automated is where the biggest productivity gains will come over the next few years.
Along the way some jobs will disappear. Number-crunching middle managers will be replaced by software. But storytelling won’t be replaced by bots. Companies pushing what Evgeny Morozov calls “solutionism” are likely to fail.
Once analysts recognize that, expect NVDA stock to take a hit. It’s that hit that will be your opportunity.
Focus on the Software Instead of Hardware Hype
Nvidia today is the leading arms merchant for the cloud. It is on the cutting edge of technologies, like inverse lithography, that speed the AI revolution along. Many of these are algorithmic changes, software executed on-chip that can scale beyond the imagination of Moore’s Law. Software is Nvidia’s moat, not hardware.
Nvidia’s software will come to market through alliances with cloud providers. It’s a new era where clouds aren’t just buying the cheapest chips, but a combination of hardware and software.
I have long said Nvidia is a software company. It doesn’t manufacture its chip designs. Taiwan Semiconductor (NYSE:TSM) and, by mid-decade, Intel (NASDSAQ:INTC), will do that, limiting Nvidia’s growth based on their capacity. There will also be competition from Advanced Micro Devices (NASDAQ:AMD), from Intel, and Apple (NASDAQ:AAPL), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Amazon (NASDAQ:AMZN), all now designing their own silicon.
There just isn’t anyone selling Nvidia stock right now, except speculators betting on short-term moves. Nvidia’s moves into AI services only increase the buying pressure.
The Bottom Line
Nvidia is a great long-term investment, but it’s a bad trade.
A long-term investor should always have a list of stocks they want to buy on weakness. Nvidia deserves to be on that list. When the market is soft, accept some losses, raise cash, and get into something better. Over the long term, Nvidia fits my definition of better. But the price is no one’s definition of weak today. If you bought Nvidia at the peak of the last tech bubble, in November 2021, you’re still showing a loss.
You had your opportunity last fall. If you took it, congratulations. If you didn’t, don’t buy into the overpriced hype and buy shares today.
Remember: Buy low, sell high.
On the date of publication, Dana Blankenhorn held long positions in TSM, AMD, AAPL, GOOGL, AMZN and NVDA. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.