Beware Nvidia Stock’s AI-Induced Bubble Trouble

Not long ago, I issued a bullish call on Nvidia (NASDAQ:NVDA) stock. I still like Nvidia’s long-term prospects as a company. However, I don’t recommend investing at any price. My concern is that artificial intelligence (AI) hype has distorted Nvidia’s valuation, so a share price pullback may be due.

There are growth stocks in 2023, and then there are hypergrowth stocks. After delving into the data, it will become evident that Nvidia stock fits squarely into the hypergrowth category.

For the “momo” (momentum trading) crowd, this might not seem like a problem. Yet, I’m urging caution and patience as Nvidia’s overeager investors may have gotten ahead of themselves.

Putting NVDA Stock in Perspective

Investors can certainly celebrate Nvidia briefly joining the $1 trillion market capitalization club. It’s a major milestone — but then, I wouldn’t consider it to be a reason, by itself, to buy NVDA stock.

To provide some perspective on Nvidia’s astounding growth, I’ll defer to Charlie Bilello, chief market strategist at Creative Planning and popular Twitter personality. Bilello observed that, year-to-date as of June 2, Nvidia stock was up 169% versus the S&P 500’s 12% gain.

Surely, this wasn’t due to Nvidia’s standing as a leading provider of graphics processing units (GPUs) for gaming consoles. Rather, it’s because Nvidia develops hardware for AI applications, and there’s a lot of enthusiasm surrounding machine learning now.

Nvidia’s Valuation Appears to Be Stretched

The AI hype helps to explain why the market is willing to ignore the fact that Nvidia’s first-quarter fiscal 2024 revenue declined 13% year-over-year to $7.19 billion. For the current quarter, Nvidia expects to generate $11 billion in revenue. Thus, both the company and the market seem to be pricing in very strong revenue growth, which could be a setup for disappointment.

Furthermore, Nvidia’s valuation looks stretched. The company’s GAAP trailing-12-month (TTM) price-to-earnings (P/E) ratio of 195.61x is far above the sector median P/E ratio of 25.19. Additionally, Nvidia’s TTM price-to-book (P/B) and price-to-sales (P/S) ratios vastly outpace their respective sector medians.

I’m not the only commentator with concerns about Nvidia’s valuation. Edmond de Rothschild Asset Management analyst Benjamin Melman recently took profits on NVDA stock. Referring to Nvidia and its sector peers, Melman warned, “Would we add to AI tech? We’re less and less sure on that as valuations are too lofty,” and, “If the gains continue, we’ll be even more cautious.”

Be Bullish But Patient With Nvidia Stock

I previously liked the idea of doubling down on Nvidia stock, but now I’m more cautious. In my opinion, risk-averse investors should wait for Nvidia stock to pull back to $350 before taking a long position.

Granted, I still expect Nvidia and other large-cap AI-associated businesses to grow over the next few years. So, it’s fine to own a few shares of NVDA stock, as long as you buy them at a reasonably fair price.

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.