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Should You Buy Nvidia Corporation (NVDA) Stock? 3 Pros, 3 Cons

Did the bubble in Nvidia stock just pop on Wednesday?

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Like many American stocks, all appeared to be well for Nvidia Corporation (NASDAQ:NVDA) through Tuesday. NVDA stock had just traded to a new all-time high. Following a blockbuster earnings report, the stock shot up. It appeared that bulls had complete control.

Should You Buy Nvidia Corporation (NVDA) Stock? 3 Pros, 3 Cons

Then, the Trump political drama hit.

The Dow plunged 372 points Wednesday, and the S&P 500 saw a similar 1.8% decline. And the tech-heavy Nasdaq Composite led the way. It plunged 2.6% on the day. Wednesday brought the market its heaviest losses since last September.

Investors didn’t spare NVDA stock; in fact, it was among the heaviest losers. It dropped $9 per share, or 6.6% on the session.

Now the question is clear: Was Wednesday’s drubbing just a one-day anomaly? Or will the huge decline lead to a broader correction in NVDA stock? Let’s examine the pros and cons for Nvidia stock here.

NVDA Stock Cons

Increasingly Bubble-like: As InvestorPlace contributor Dana Blankenhorn warned recently, Nvidia stock is looking more and more like a bubble. Blankenhorn makes the comparison to Amazon.com, Inc. (NASDAQ:AMZN) in 1999. Like NVDA today, Amazon then was a fast-growing company with nearly unlimited potential. Yet, Amazon traded at such a ridiculously high price that it would take the company’s stock a decade to reach new highs from its dot.com bubble peak.

Nvidia, similarly, has run six-fold in less than two years. Its stock is trading at a nearly unheard of 45x earnings. That’s simply unprecedented for a semiconductor firm. While the whole sector is booming, other strong players with self-driving auto ambitions such as Texas Instruments Incorporated (NYSE:TXN) trade at just 22x earnings. And even that is expensive by typical sector standards.

How Much Are the Newer Businesses Worth? A good chunk of the recent earnings upside at Nvidia has come from gaming. However, NVDA has long been a gaming-focused company, and it historically traded around 3x enterprise value/revenues. This ratio has now exploded to 11x.

Bulls will suggest that this is justified by the autos and data centers business. However, there are other semiconductor companies involved in both of those sectors, and nobody is trading near 11x enterprise value/sales either. Texas Instruments, with its surging autos business and moat-heavy analog chips core, sells for 5.5x EV/sales. Sure, Nvidia may have somewhat more exciting growth prospects, but it’s a tough stretch to say it’s worth twice as much on multiple valuation metrics as a solid competitor.

Vulnerable to Broad Market Sell-off: As Wednesday showed, when the stock market goes down, NVDA stock gets pummeled. This is for a simple reason. Nvidia stock is extremely popular with momentum traders, algos, hedge funds and other such hot money shops. These sorts of traders tend to use a lot of leverage and will dump stock as soon as it stops going up.

Wednesday afternoon, we saw many heavily shorted “old economy” stocks such as mall real estate investment trusts shoot up, while popular tech stocks slumped. It appears that the trade of buying tech and banks and selling virtually everything else may be drawing to a close. Trump was supposed to cut corporate taxes and allow tech companies to bring cash home. This powered a huge run in the Nasdaq. But if Trump loses more political steam, look for NVDA stock to remain weak as investors dump tech.

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Article printed from InvestorPlace Media, http://investorplace.com/2017/05/should-you-buy-nvidia-corporation-nvda-stock-3-pros-3-cons/.

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