While technology investors banking on the rise of artificial intelligence generally have plenty of reasons to smile, graphics processing unit (GPU) powerhouse Nvidia (NASDAQ:NVDA) may encounter a slight speedbump on July 24. That’s when operators of the Nasdaq-100 will rebalance its weighting as the index has become too heavily geared toward the so-called “Magnificent Seven,” of which NVDA stock is a part.
Aside from the GPU juggernaut, the other members of the elite club include Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), Meta Platforms (NASDAQ:META), Microsoft (NASDAQ:MSFT) and Tesla (NASDAQ:TSLA). Based on reporting by CNN Business, the Magnificent Seven account for approximately 51% of the Nasdaq-100 as of early June. They also drove the lion’s share of this year’s tremendous market rally.
With NVDA stock gaining well over 200% since the start of the year and with such a performance not being unreasonable within the rarefied category, the July 24 announcement came as no surprise. Plus, the rebalancing offers a practical measure for the investor community.
“The huge gains mean that these big tech stocks have become bloated in some indexes, which are often weighted by market capitalization,” wrote Krystal Hur of CNN. “That can pose a problem to investors, since it leaves the market vulnerable to large swings driven by just a handful of companies.”
Nevertheless, should investors of NVDA stock be concerned about the July 24 event?
NVDA Stock Continues to Power Through a Wall of Worry
Against key financial metrics, NVDA stock represents one of the most overvalued securities available. According to investment data aggregator Gurufocus, NVDA trades at a trailing earnings multiple of 237.29 and a forward (projected) earnings multiple of 60. Both stats rank well into the stratosphere for the underlying semiconductor industry.
Investors are just getting started with these smoking-hot numbers. Right now, NVDA stock trades at a price/earnings-to-growth (PEG) ratio of 12.23 times. Per Investopedia, the PEG ratio represents a valuation measure whereby a value of 1 represents a perfect correlation between a firm’s market value and its projected earnings growth. Ratios higher than 1 indicate an overvalued enterprise.
Pouring salt on open wounds, the market also prices NVDA stock at a trailing revenue multiple of 44X and a book multiple of 46X. Nevertheless, Nvidia shares are no worse for wear, gaining about 8% in the past five sessions.
Largely, enthusiasm for the tech stalwart continues to run hot, thanks to analyst support. For instance, Citi analyst Atif Malik boosted his price target of NVDA to $520 from $420 on Monday. “To us, it is clear the market for [artificial intelligence] accelerators is bound to grow at a blistering pace,” the expert wrote.
Given Nvidia’s advantage in the AI arena, the company can potentially power through a wall of worry despite a possible hiccup next week.
Why It Matters
According to Morningstar, the July 24 rebalancing may have a noticeable effect on investors of funds tracking the Nasdaq-100. Per the investment resource, “[t]hese portfolios face trading costs from the rebalance that could cause a minor drag on performance, and selling high-performing stocks comes with the potential for a tax bill for funds.”
Still, for individual holders of the Magnificent Seven — and especially for NVDA stock — life appears grand. Currently, Nvidia commands an analyst consensus view of strong buy. Moreover, the experts’ average price target lands at $484.30, implying almost 6% upside potential from today’s elevated level.
On the date of publication, Josh Enomoto 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.
