The recent price movement of Nvidia stock is puzzling, and how you approach the stock could affect whether you make money from it.
Do you remember where you were during the great NVIDIA (NVDA 4.55%) Dip of 2024?
Nvidia, arguably the flagship of the artificial intelligence (AI) market rally, was trading at all-time highs in mid-July. Then the stock quickly plunged 20% when markets briefly became fearful in early August. A few weeks later, Nvidia is already trading near its previous highs.
Was the sudden sell-off a coincidence or is there a risk that the Nvidia train will derail?
Three Motley Fool contributors weigh in on Nvidia stock’s recent momentum and whether it’s a good stock to buy today. Here’s what you need to know.
Nvidia stock remains a leader in AI chips, but caution is advised when buying
Will Healy: Admittedly, you can’t discuss the bull run in generative AI stocks without mentioning Nvidia. As the leading AI chipmaker, the company has posted massive share price gains since fall 2022, and investors shouldn’t expect Nvidia to be dethroned as the industry leader anytime soon.
In fact, competitors such as Advanced micro devices And Qualcomm have entered this market aggressively. But despite some setbacks, Nvidia continues to innovate with the upcoming Blackwell chip, and such updates should help the company maintain its market leadership.
However, it is also safe to say that the market has priced this dominance into the stock. Since its 2022 bear market bottom, the stock has risen as much as 1,000%.
This rapid growth may cause the price-to-earnings (P/E) ratio to under-represent its valuation. But make no mistake: The company is expensive by most standards. The recent bull market surge has pushed the price-to-sales (P/S) ratio to nearly 40, well above the S&P500 Average 3.
However, forecasts for triple-digit revenue growth bode well for Nvidia despite the disastrous P/S ratio. Among forecasts, the P/S ratio is 26 and the P/S ratio for the coming year falls to 19. While these ratios still make the stock expensive and vulnerable to sell-offs in the near future, they also make it less likely that any decline in Nvidia stock will be permanent.
Therefore, investors who are not overly risk-averse should not only hold onto their Nvidia shares but also consider gradually adding shares through dollar-cost averaging (DCA). DCA investing allows investors to maintain a position while still having the opportunity to buy shares at a lower price in the event of a short-term decline.
Ultimately, Nvidia’s leadership in AI chips has made the stock an expensive stock. Still, by using a DCA approach, investors should be able to safely add to positions while leaving some cash to buy more shares during likely price fluctuations.
Nvidia is a wonderful company, but its stock is very expensive
Jake Lerch: Is Nvidia a great company? Yes. Does it a miraclerich future ahead of us It? More than likely. Do I want to buy Nvidia stock now? Not really.
In short, this is the paradox I am facing at Nvidia at the time of writing this article. I know the company has a great range of blockbuster products. I know Sales are through the roof and You will is likely to expand further in the coming years.
Still, Nvidia stock is just so expensive. So so expensive that my inner value investor constantly begs me to stop saying yes to Nvidia.
Here’s what’s happening in numbers:
NVDA PS ratio data from YCharts.
Not long ago, Nvidia stock was sporty a price-to-sales ratio (P/S) below 3. Admittedly, that was low, as the average P/S ratio for technology companies is usually in the high single digits. But today, the stock’s P/S ratio is an incredible 40. That is not only far above the average for all stocks, — including technology stocks — That’s more than double the 10-year average of Nvidia stock itself.
As recently as 2022, investors could buy Nvidia shares for ten times sales. Those days are long gone, and that gives me cause for reflection. Even on a P/S basis for the next one year, Nvidia shares are trading at an all-time high.
NVDA PS Ratio (Forward 1 Year) data by YCharts.
Of course, the company could issue a forecast that beats current estimates and sends the stock even higher, but it could also dampen expectations and disappoint the market. Given the current valuation, that could mean a big drop for the stock. So, I find Investors who do not yet have a position at Nvidia should wait rather than jumping on the Nvidia bandwagon now.
Nvidia could be vulnerable if the market stalls
Justin Pope: Nvidia shareholders have enjoyed market-shattering returns with relative ease until the recent crash. I don’t know if Nvidia will be higher next month than it is today; nobody knows. But the recent drop in stock price teaches investors an important lesson about volatility: It cuts in both directions.
Investors can use a stock’s beta to gauge its volatility. A stock that behaves exactly like the S&P 500 has a beta of 1. A beta of less than 1 means the stock is less reactive to the market; it will rise more slowly when the broader market rises and fall more slowly when it falls. A beta of more than 1 signals a more reactive stock; it will outperform the market on good days and fall faster on bad days. Nvidia’s beta is nearly 1.7; it has crushed the market as the S&P 500 has been steadily chugging higher due to Wall Street’s enthusiasm for AI technology. The market had a rough few days in early August, with Nvidia stock plunging as much as 20% from its high.
Nvidia is now widely known as a frontrunner in AI chips, so I’m not ruling out the potential long-term growth opportunities. However, as my colleagues at Fool.com have pointed out, the stock is expensive right now. The fact is that Nvidia remains vulnerable 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 reeling in the coming months. Economic data shows a weakening economy, including a massive downward revision to American job growth last year. It remains to be seen whether and to what extent the Federal Reserve will begin cutting interest rates. And as if that weren’t enough, there’s a presidential election coming up in just a few months. The market has been remarkably resilient since early last year, but taking that for granted would be unwise.
So how should investors handle this? Since no one can predict the market or events that can affect stocks, a dollar-cost averaging strategy is the way to go. As Will said, buying slowly and steadily through highs and lows allows investors to make the most of market volatility.
