Nvidia’s stock movement lately creates a conundrum. How you approach the stock could impact whether it makes you money.
Do you remember where you were during the great Nvidia (NVDA 4.55%) dip of 2024?
Nvidia, arguably the flagship stock of the artificial intelligence (AI) market rally, was trading at all-time highs in mid-July. Then it quickly stumbled by 20% when markets briefly turned fearful in early August. Fast-forward a couple of weeks, and Nvidia is already trading back near its former highs.
Was the sudden sell-off a fluke, or is the Nvidia bandwagon at risk of going off the rails?
Three Motley Fool contributors weighed in on Nvidia stock’s recent momentum and whether shares are worth buying today. Here is what you need to know.
Nvidia stock will remain the AI chip leader, but buy cautiously
Will Healy: Admittedly, one cannot discuss the bull run in generative AI stocks without discussing Nvidia. As the dominant producer of AI chips, it drove massive stock gains since the fall of 2022, and investors should not expect Nvidia to be unseated as the industry leader anytime soon.
Indeed, competitors such as Advanced Micro Devices and Qualcomm have moved aggressively into this market. But despite some setbacks, Nvidia continues to innovate with the upcoming Blackwell chip, and such updates should help it maintain its market leadership.
However, it is also safe to say the market has priced this dominance into the stock. Since its low point of the 2022 bear market, the stock has risen by as much as 1,000%.
That rapid growth may make its price-to-earnings (P/E) ratio a poor reflection of its valuation. But make no mistake; it is expensive by most measures. Its surge in the most recent bull market has taken the price-to-sales (P/S) ratio to almost 40, far above the S&P 500 average of 3.
However, forecasts of triple-digit revenue growth bode well for Nvidia despite the nosebleed P/S ratio. Amid the predictions, the forward P/S ratio is 26, and the forward one-year P/S ratio falls to 19. While those ratios still make the stock pricey and vulnerable to sell-offs in the near term, they also make it less likely any pullback in Nvidia stock will be long-lasting.
Hence, investors who are not highly risk averse should not only keep their Nvidia shares but also consider gradually adding shares through dollar-cost averaging (DCA). DCA investing allows investors to have a position while leaving them open to buy shares at a lower price amid any near-term pullback.
Ultimately, Nvidia’s leadership in AI chips has made it a pricey stock. Still, by employing a DCA approach, investors should be able to safely add to positions while leaving some cash available to buy more shares amid the likely price fluctuations.
Nvidia is a wonderful company, but its stock is very expensive
Jake Lerch: Is Nvidia a great company? Yes. Does it have a wonderful future ahead of it? More than likely. Do I want to buy Nvidia shares right now? Not really.
In a nutshell, that’s the paradox I find myself confronting with Nvidia as of this writing. I know the company has a great lineup of blockbuster products. I know its sales are through the roof, and they’ll likely keep expanding for years to come.
Yet, Nvidia’s stock is just so expensive. So expensive in fact that my inner-value investor keeps begging me to stop saying yes to Nvidia.
Here’s what’s going on by the numbers:
NVDA PS Ratio data by YCharts.
Not that long ago, Nvidia’s stock sported a price-to-sales (P/S) ratio below 3. Granted, that was low, as the average tech P/S ratio is typically around the high-single digits. But today, the stock’s P/S ratio is an incredible 40. Not only is that far above the average for all stocks — including tech stocks — it’s more than twice the 10-year average for Nvidia stock itself.
As recently as 2022, investors could scoop up shares of Nvidia by paying 10 times sales. Those days are long gone, and that’s giving me pause. Again, even on a one-year forward P/S basis, Nvidia’s stock is trading at historically high levels.
NVDA PS Ratio (Forward 1y) data by YCharts.
Sure, the company could release guidance that blows away the current estimates and sends the stock even higher, but it could also temper expectations and leave the market disappointed. Given its current valuation, that might mean a big drop for the stock. So, I think investors who don’t already have a Nvidia position should wait and see rather than jump on the Nvidia bandwagon right now.
Nvidia could be vulnerable if the market falters
Justin Pope: Nvidia shareholders enjoyed market-crushing returns with relatively little stress until the stock’s recent stumble. I don’t know if Nvidia will be higher next month than today; nobody knows. However, the recent dip teaches investors an essential lesson about volatility: It cuts in both directions.
Investors can use a stock’s beta value to gauge its volatility. A stock that behaves exactly like the S&P 500 will have a beta value of 1. A beta of less than 1 means the stock is less reactive to the market; it rises slower when the broader market goes up and falls slower when it goes down. A beta of more than 1 signals a more reactive stock; it will outperform the market on good days and fall faster on the market’s bad days. Nvidia’s beta is almost 1.7; it has crushed the market because the S&P 500 has continually chugged higher on Wall Street’s excitement for AI technology. The market had a rough few days in early August, and Nvidia’s stock plunged to 20% off its high.
At this point, Nvidia is widely known for its leadership in AI chips, so I’m not denying the potential long-term growth opportunities. However, as my fellow Fool.com contributors have pointed out, the stock is expensive today. The reality is that Nvidia remains susceptible to aggressive selling pressure if volatility returns to the broader market. I’m no fortune teller, but it’s not hard to imagine the market getting shaky over the coming months. Economic data shows a weakening economy, including a massive downward revision to America’s job growth over the past year. It remains to be seen whether the Federal Reserve will begin cutting interest rates and to what extent. And if that wasn’t enough, there is a presidential election just months away. The market has been remarkably resilient since early last year, but taking that for granted would be unwise.
So, how should investors play this? Since nobody can predict the market or events that may impact stocks, a dollar-cost average strategy is the way to go. As Will said, slow and steady buying through the ups and downs will help investors make the most of any market volatility.