Unless you've been living under a rock (or else aren't too interested in finance or investing), you've probably heard about the explosive rise of US chip and artificial intelligence (AI) stock NVIDIA Corporation (NASDAQ: NVDA) over the past year or two.
Nvidia has been a much-loved growth stock for a while now. But its growth has gone from stratospheric to astronomic over the past 12-18 months.
To give you an idea of what that looks like, the Nvidia share price has put on 181.5% in 2024 alone (as of the US markets' Wednesday close). Those gains stretch to 209.5% over the past 12 months and a stupendous 3,477% over the past five years.
Obviously, I would have loved to own this stock, ideally for at least five years. But I don't. And I'm not going to buy any.
Nvidia is an incredible company, no one disputes that. The earnings numbers it has been cranking out over the past few months have been almost unbelievable. To illustrate, back in May, the company's quarterly report showed revenues surging 262% year over year to US$26 billion.
I wouldn't be surprised to see this kind of growth continue for at least another year or two.
So why wouldn't I want to buy this company? Well, I am seeing the classic signs that Nvidia shares are entering 'bubble' territory.
Is Nvidia stock in a bubble?
Investors always love a market darling. When it seems a company can do no wrong and is the centre of the future, everyone understandably wants a slice of the action. We always see this kind of thing on the investing markets, albeit not on Nvidia's scale.
On the ASX, we had Afterpay and Zip Co Ltd (ASX: ZIP) a few years ago.
On the US markets, electric vehicle manufacturers were all the rage back in 2021 and 2022. We saw companies like Tesla, Rivian and Nikola explode in value, only to shrink once the hype faded. Many of these companies had strong numbers to back up their growth stories, to be sure. No one disputes that the trajectory of electric vehicles is still on the rise.
But there was hype in that space. And that hype faded. As it almost always does. Today, Tesla shares are still well above (over 1,100%) what they were five years ago. But the company is also down 55% or so from its record high.
Rivian shares have plummeted by 91.5% from their 2021 peak, while Nikola shares have also dropped by over 99% from their peak.
I'm not saying this will happen with Nvidia. In my view, the company's future is bright. But I don't think it's sustainable for a multi-trillion company to rise by 43% in one month, as Nvidia stock has. I think eventually, the company will come down to earth. As Benjamin Graham once said, 'in the short run, the market is a voting machine, but in the long run, it is a weighing machine".
Investors are clearly voting Nvidia stock higher right now. But I'm willing to wait and see what the market eventually weighs it at. I could be wrong here. Perhaps Nvidia goes on to become a US$4 trillion company or even a US$5 trillion one in 2024 or 2025. But I think that's a roll of the dice at this stage, and I don't roll dice in my portfolio.
