This wasn’t supposed to happen. As a technology firm, Nvidia Corporation (NASDAQ:NVDA) should at most be fighting for every inch in the markets ala Apple, Inc. (NASDAQ:AAPL). Yet here we are. Since Donald Trump took the 2016 election by storm, Nvidia stock is up 48%. And in early morning trading today, NVDA stock is up more than 3.5% because of analyst target price hikes from Goldman Sachs and Mizuho. It’s a whole new level of crazy that can only be rivaled by speculative pharma companies or perhaps bitcoin.
Nevertheless, it’s easy to see why Nvidia stock is so loved by investors in the know.
Primarily, the semiconductor and graphics card manufacturer positioned itself as a leader in the smart car revolution. Pioneered by innovation experts like Tesla Motors Inc’s (NASDAQ:TSLA) Elon Musk, automated driving vehicles will eventually be the norm.
That suits owners of NVDA stock just fine, as the firm recently announced a partnership with Tesla. This agreement involves Nvidia supplying computer chips to power the auto-drive process.
Another “big league” win for Nvidia stock is its contract with Nintendo Co., Ltd (ADR) (OTCMKTS:NTDOY). The iconic video game company will use NVDA graphics cards to run its highly anticipated console, the Nintendo Switch. After losing out on lucrative gaming deals with Microsoft Corporation (NASDAQ:MSFT) and Sony Corp (ADR) (NYSE:SNE) — both of which are powered by graphics cards from heated rival Advanced Micro Devices, Inc. (NASDAQ:AMD) — this is a coming-of-age moment for NVDA stock.
I simply love how InvestorPlace contributor Joseph Hargett stated that Nvidia stock “could easily top $100.” He was right. In less than two weeks, shares strolled from $95 to $100 and some change. It’s not often that a call goes so right, so soon, but that’s the beauty of NVDA stock.
But the question now is, can this surge sustain itself? Both history and I have our doubts.
Nvidia Stock Has Flown So Far, So Fast
Before you accuse me of being a “negative Nancy,” let me clarify that I was bullish on Nvidia stock. Back in August of this year, I cited the company’s strong fundamentals. These confidence-inspiring factors include profitability margins and a return-on-equity ratio that is among the upper echelon of the tech market. More importantly, the financials for NVDA stock aren’t merely built on cost-cutting. For example, sales growth — while significantly lower than in the past — is still ranked favorably in its industry.
These are great reasons for buying Nvidia stock at $61. But at $100-plus — and especially over a wickedly short time frame — I have to take a step back.
In fact, we should all do that. Back then, NVDA stock was up 76% year-to-date, an impressive feat no matter which way you cut it. But from that point until now, Nvidia stock has skyrocketed to 67%. That means that on a YTD basis, shares are up nearly 220%. Just as a means of comparison, the wildly speculative AMD is up 295%.
The point I’m trying to get across is that you have to know when to cash in your chips. Don’t get me wrong — you can still ride the momentum in Nvidia stock. But one of the core lessons you learn as an investor is to control your emotions; in this case, greed. After such a monster leap in the markets, it just makes sense to take some risk off the table.
Why NVDA Stock Looks Less Compelling
History is an appropriate guide here.
The average share price for Nvidia stock this year jumped more than 120% over last year. That’s a multi-year record.
In fact, this is the second-biggest leap in average share price in the company’s history. When drawn on a chart, the difference is massive.
I’m also tentative on the return performance of NVDA stock after such a robust and effective rally. Not once in its publicly traded history has Nvidia stock turned two consecutive triple-digit returns.
The average return after such a move is a drop of 20%. Sure, 2017 could be different. As soon-to-be President Trump has shown, there’s a first time for anything.
But at this rate, even the fundamental folks are alarmed. By crossing into triple-digit territory, NVDA stock can no longer be said to be a good value. Against projected earnings, Nvidia is still pricey relative to the competition. And while it’s a leader in exciting industries like automated vehicles, staying there is not a guaranteed state.
The bottom line for me is that NVDA is a great company. However, even the best names get overbought, and that’s exactly what has happened. Solid arguments supported Nvidia stock when it was trading well under a “Benjamin.” Now, it’s a tad too rich to justify a buy rating.
As of this writing, Josh Enomoto owned shares of SNE.