Should You Get On The Nvidia Stock Bandwagon? 3 Motley Fool contributors weigh in

You remember where you were during the big time Nvidia (NVDA 4.55%) decrease from 2024?

Nvidia, perhaps the flagship stock of the artificial intelligence (AI) market rally, traded at all-time highs in mid-July. It then quickly stumbled 20% when markets briefly became fearful in early August. Fast forward a few weeks and Nvidia is already trading near its previous highs.

Was the sudden sell-off a fluke or is the Nvidia bandwagon at risk of falling apart?

Three Motley Fool contributors weighed in on Nvidia’s recent stock rally and whether the stock is worth buying today. Here’s what you need to know.

Nvidia stock will remain the AI ​​chip leader, but buy with caution

Will Healy: Of course, one cannot discuss the bull run in generative AI stocks without discussing Nvidia. As the dominant maker of AI chips, it has generated massive stock gains since the fall of 2022, and investors shouldn’t expect Nvidia to be dethroned as the industry leader anytime soon.

Indeed, competitors such as Advanced microdevices and Qualcomm have moved aggressively into this market. But despite some setbacks, Nvidia continues to innovate with the upcoming Blackwell chip, and such updates should help it maintain its market leadership.

However, it’s also safe to say that the market has priced in this dominance in the stock. Since its 2022 bear market low, the stock has risen as much as 1,000%.

This rapid growth can make the price-to-earnings (P/E) ratio poorly reflect its valuation. But make no mistake; it is expensive by most measures. Its rise in the most recent bull market has pushed its price-to-sales (P/S) ratio to nearly 40, well above the S&P 500 average of 3.

However, forecasts of triple-digit revenue growth bode well for Nvidia, despite the nosebleed P/S ratio. Against forecasts, the forward P/S ratio is 26 and the one-year forward P/S ratio is down to 19. While these ratios still make the stock expensive and vulnerable to short-term selling, they also do. any pullback in Nvidia stock is less likely to be long-lasting.

Therefore, investors who are not very risk-averse should not only hold on to Nvidia shares, but also consider gradually adding to the stock through dollar cost averaging (DCA). DCA investments allow investors to take a position while leaving them open to buying shares at a lower price amid any near-term pullback.

Finally, Nvidia’s leadership in AI chips has made it an expensive stock. However, by using a DCA approach, investors should be able to add to positions safely while leaving some cash available to buy more stocks amid possible price fluctuations.

Nvidia is a wonderful company, but its stock is very expensive

Jake Lerch: Is Nvidia a great company? Yes. It has a miraclefull future ahead this? More than likely. Do I want to buy Nvidia stock right now? Not really.

In short, this is the paradox I’m facing with Nvidia as I write this article. I know the company has a great range of successful products. i know its sales are through the roof and they want likely to expand in the coming years.

Still, Nvidia stock is so expensive. So expensive, in fact, that my inner value investor keeps begging me not to say yes to Nvidia.

Here’s what’s happening by the numbers:

NVDA PS Ratio data by YCharts.

Not long ago, Nvidia stock sport a price-to-sales ratio (P/S) below 3. Of course, this was low, as the average technology P/S ratio is usually around the high numbers. But today, the stock’s P/S ratio is an incredible 40. Not only is it well above the average for all stocks. — including technology stocks — that’s more than twice the 10-year average for Nvidia stock itself.

In 2022, investors could earn shares of Nvidia paying 10 times sales. Those days are long gone and that gives me pause. Again, even on a one-year P/S basis, Nvidia stock is trading at historically high levels.

NVDA PS Ratio data (Before 1y) by YCharts.

Sure, the company could release guidance that smashes current estimates and sends the stock even higher, but it could also temper expectations and leave the market underwhelmed. Given its current valuation, that could mean a big drop for the stock. So, I think so investors those who don’t already have an Nvidia position should wait and see rather than jump on the Nvidia bandwagon right now.

Nvidia could be vulnerable if the market falters

Justin Pope: Nvidia shareholders have enjoyed market-crushing returns with relatively little stress until the stock’s recent stumble. I don’t know if Nvidia will be bigger next month than it is today; no one knows. However, the recent decline teaches investors a key lesson about volatility: It cuts in both directions.

Investors can use a stock’s beta to gauge its volatility. A stock that behaves exactly like the S&P 500 will have a beta of 1. A beta of less than 1 means the stock is less reactive to the market; it rises more slowly when the broader market rises and falls more slowly when it falls. A beta greater than 1 signals a more reactive stock; it will outperform the market on good days and fall faster on bad market days. Nvidia beta is almost 1.7; crushed the market as the S&P 500 continued to rise with Wall Street’s enthusiasm for AI technology. The market had a rough couple of days in early August, with Nvidia shares down 20% from their highs.

At this point, Nvidia is widely known for its leadership in AI chips, so I’m not denying potential long-term growth opportunities. However, as my fellow Fool.com contributors pointed out, the stock is expensive today. The reality is that Nvidia remains susceptible to aggressive selling pressure if volatility returns to the broader market. I’m not guessing, but it’s not hard to imagine that the market will shake out in the coming months. Economic data shows a weakening economy, including a massive downward revision to America’s job growth over the past year. It remains to be seen whether the Federal Reserve will begin to cut interest rates and to what extent. And if that wasn’t enough, there’s a presidential election just a few months away. The market has been remarkably resilient since the start of last year, but to take that for granted would be unwise.

So how should investors play this? Since no one can predict the market or the events that may impact stocks, a dollar cost averaging strategy is the way to go. As Will said, slow and steady buying through the ups and downs will help investors make the most of any market volatility.