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Nvidia succumbs to law of gravity. For how long?
Nvidia, the chip giant riding a wave of hope and hype about artificial intelligence, has taken a bit of a breather lately. Shares are down more than 10% from the all-time high they hit last month, what Wall Street insiders would consider a correction. The stock has fallen the past four trading days too, but is up a bit on Tuesday.
Of course, this isn’t necessarily a sign that doom is nigh for Nvidia. The company is still worth more than a trillion dollars after all. Earnings and sales are both expected to explode this year and for the next few years due to its graphic processing units are used in gaming, crypto mining and and many other high-tech applications.
But the recent pullback does show that investors can sometimes get a little too excited about the future. Yes, Nvidia stands to benefit immensely from the increased use of AI technology. That may be more than priced into the stock at this point though. Shares have surged almost 215% already this year and trade at the premium valuation of more than 40 times this year’s earnings estimates.
Other tech companies touting AI have been hurt when their results failed to live up to lofty expectations. Just look at Oracle today. The software titan’s stock is down more than 10% due to slowing cloud growth. Oracle co-founder, chairman and chief technology officer Larry Ellison is still a big fan though.
“Is Generative AI the most important new computer technology ever? Maybe!," Ellison trumpeted in the company’s earnings release.
This is not to suggest that Nvidia’s stock is going to tank. But anytime shares skyrocket so much due to hope about a new, emerging trend, you have to be careful. Remember how marijuana legalization was expected to be a boon for cannabis companies? Many of the leaders in the industry are now penny stocks, even though they got investments from top consumer products companies.
Of course, there’s a gargantuan difference between Nvidia and, say, Canopy Growth. But investors have to be wary of the Wall Street hype machine. Even quality companies like Nvidia can get ahead of themselves. It’s also worth noting that Nvidia now has a big target on its back. Competitors such as AMD and Intel will do all they can to eat into Nvidia’s market shares. And short-term momentum traders can be unforgiving if growth suddenly slows or unreasonably high expectations are not met.
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