It’s not easy to be cautious when the market is so enthused about Nvidia (NASDAQ:NVDA). Yet, sensible investors need to know when to walk away. NVDA stock rode high on artificial intelligence (AI) mania, but Nvidia’s value to the shareholders can’t just keep growing forever.
Many financial traders like Nvidia because it manufactures chips for generative AI applications. Thus, there’s no need to bet their money on AI app makers, when they can invest in a company that sells the hardware that the apps will all need.
In other words, NVDA stock is a prime picks-and-shovels play for the generative AI revolution. This is a logical bullish argument — but then, it’s already well-known and has been fully priced into Nvidia shares. That’s the problem here, and I’m afraid that some folks will jump on a trend that’s past its expiration date.
NVDA Stock Looks Exhausted
Make no mistake about it — Nvidia could continue to be a darling of the market for a while. If you don’t believe this, consider how high tech stocks went in 1999 and early 2000 before the dot-com bubble finally burst.
Could the AI hype of 2023 mirror the internet hype of 2000? Nvidia seems to be the poster child of the current hype phase, as NVDA stock has rallied from $143 to $480 this year.
Now, the stock is struggling to break above $500 and there’s a huge air pocket below. However, Nvidia will have its second-quarter 2023 earnings results and conference call later this month, and that event could be a positive catalyst for Nvidia. But then, it could also precipitate a selloff if the market’s expectations are too high.
Analysts Scramble to Life Their Nvidia Price Targets
As a contrarian investor, I don’t view high expectations as a good thing. It’s better for the market to set a low bar that a company can easily clear, especially when there’s a quarterly earnings event coming up.
That’s why I’m raising a red flag for Nvidia. Analysts are absolutely enamored with this company now. A $500 share-price target isn’t good enough anymore. Recent targets for NVDA stock include $575 from Susquehanna analysts, as well as $600 from Citigroup analysts and another $600 from Barclays analysts.
Meanwhile, analysts at Bernstein are clearly in the bullish camp. They envision “Nvidia’s numbers sustaining, and likely heading higher, for quite some time to come, at least the next 12-18 months.”
And so, hardly anyone on Wall Street seems to take issue with Nvidia’s valuation. Alarmingly, Nvidia has a trailing-12-month price-to-earnings (P/E) ratio of around 234x. When this magnitude of valuation is normalized and even embraced, that’s when the market’s high flyers are vulnerable to a crash landing.
Take Profits With NVDA Stock While You Still Can
The idea here isn’t to denigrate Nvidia, which is a remarkable company. Rather, I’m just putting out a call for sanity. I saw and experienced this type of hype in 2000, and it’s not a movie with a happy ending.
If you were brilliant/lucky enough to buy NVDA stock earlier this year, consider taking profits. Chances are, we’re witnessing a topping process right now. And remember, no company can be the market’s darling forever — not even Nvidia.
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.