Has Nvidia, the beloved pioneer in Artificial Intelligence (AI), potentially ventured too near the radiant intensity of its own achievements?

Has Nvidia, the beloved pioneer in Artificial Intelligence (AI), potentially ventured too near the radiant intensity of its own achievements?

Examining Nvidia (NVDA incrementing by 0.80%), some investors might discredit it as overpriced, considering its substantial surge of approximately 12 times since its 2022 bear market nadir.

Its valuation and expansion rate increase concerns that it's skirting too near the edge and will plummet when its structure succumbs. Even its most enthusiastic supporters acknowledge it's not a cut-price semiconductor stock, albeit "too near the edge" might be an overstatement, and here's why.

The Nvidia Revolution

Nvidia reshaped the semiconductor landscape by launching a more sophisticated version of ChatGPT in the initial months of 2023. Observers noticed that AI accelerators powered this enhanced performance, resulting in skyrocketing demand for these AI chips, and Nvidia was remarkably well-equipped to meet that demand.

In essence, this product revolutionized Nvidia. As recent as the third quarter of fiscal 2022, the data center segment, which produces AI accelerators, contributed fewer revenue shares than Nvidia's primary business, gaming.

By the third quarter of fiscal 2025 (Oct. 27 terminal point), the data center segment accounted for 88% of revenue!

Competitors like AMD, Intel, and Qualcomm have made concerted efforts to narrow the competitive gap. Despite surging demand for AI accelerators surpassing supply, this market opportunity exists for competitors. Nevertheless, Nvidia's innovation has kept it atop in this realm. With this lead advantage, it's highly improbable any competition will catch up soon.

Warning Signs for Nvidia Stock

Nvidia's extraordinary growth figures might warrant doubts when scrutinizing its results more closely.

At first glance, these numbers suggest extraordinary development, with the fiscal third-quarter revenue reaching $35 billion, rising 94% year-over-year, and its net income soaring 109% over the same span.

Investors should recall that larger corporations tend to grow gradually due to the law of large numbers. Therefore, Nvidia's capacity to deliver such growth, despite its $3.2 trillion market cap, is truly remarkable.

Even though Nvidia's revenue expanded by 135% over the first three quarters of fiscal 2025, leading to a 190% increase in net income, this signals a deceleration.

Triple-digit revenue growth is an unachievable feat even for companies far smaller than Nvidia. Nevertheless, investors may penalize stocks when such increases ineluctably lessen, which appears to be happening to Nvidia.

Additionally, the stock's valuation could accelerate the decline. A cursory examination of its stock might not reveal any overvaluation, as its trailing P/E is 52. Meanwhile, its price-to-sales ratio (P/S) of 29 might be high but still bearable for a high-flying tech stock.

However, its ratio of price to book value (P/BV) likely places the stock in a bubble. Nvidia currently trades at a book value multiple of 49, far exceeding the P/BV ratios of AMD and its market leader, Taiwan Semiconductor, which sell at 3.6 times and 8.3 times book value, respectively. This large premium may prompt additional investors to sell the stock, even as it continues leading in AI accelerators.

Is Nvidia Skirting Too Near the Edge?

Although Nvidia may experience some rough patches in the near future, it's unlikely it's skirting too near the edge.

Considering the decelerating revenue growth and its 49 P/BV, the stock's current price is undoubtedly overrated. This overvaluation could induce struggles or even declines in the short term and perhaps beyond.

However, its remarkable expansion should swell Nvidia's "temperature resistance" over time. When its sales and book value multiples align more closely with its growth and earnings, the company will likely thrive at greater altitudes – likely more than it does now.

Thus, despite Nvidia's current proximity to the edge, investors should not expect this to last over the longer term.

Investors may question the sustainability of Nvidia's growth, given its current valuation and the decelerating revenue growth. The company's high price-to-book value (P/BV) of 49, significantly higher than its competitors, could potentially lead to selling pressure.

In the realm of finance, smart investors often diversify their portfolio by investing in various sectors, including stocks like Nvidia. While considering the risk and reward of investing in Nvidia, it's essential to keep an eye on its financial health and growth prospects.

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