Prediction: Nvidia stock may decline for the rest of 2024

Perhaps no stock has risen faster than Nvidia (NVDA 1.53%). At one point, it rose about 1,000% in less than two years, briefly taking its market cap to $3.2 trillion before retreating.

However, the company’s stock rally has been so extreme that even its stellar earnings report for the second quarter of fiscal 2025 (ended July 31) failed to prevent a significant selloff in its stock. Between the company’s likely overvaluation and a shift in momentum, investors should probably avoid the semiconductor stock for the remainder of 2024.

Nvidia status

Given the recent pullback, investors need to exercise some perspective. The burning demand for AI chips and Nvidia’s considerable advantage in this niche of the chip industry make it arguably the most important semiconductor stock.

The growth of the AI ​​chip market has been so explosive that Allied Market Research estimates a compound annual growth rate (CAGR) of 38% through 2032. This is well above the 6% CAGR that Allied has estimated for the industry chips as a whole by 2031.

Additionally, Nvidia looks set to start shipping its next-generation Blackwell AI chip in the fourth quarter. This should help it maintain its market lead as its competitors struggle to catch up with the chip giant.

Given Nvidia’s technical leadership, current shareholders should probably stick with the stock, as it will likely remain a long-term winner. In time, it may even replace combat Intel as a Dow 30 stock.

So what happened?

Despite Nvidia’s huge potential, the near-term outlook for its stock looks increasingly bleak. Amid multiple quarters of triple-digit revenue growth, the company ultimately fell short of increasingly high expectations. As a result, the stock is down about 25% from its 52-week high.

Of course, its earnings might have seemed justified from a price-to-earnings (P/E) ratio perspective. At just 48 times earnings, Nvidia can show understated when considering the company’s triple-digit percentage revenue and earnings growth.

Still, the other metrics may have left investors questioning Nvidia’s current price. Its price-to-sales (P/S) ratio topped 40 as recently as July, and its current sales multiple of about 27 makes it expensive by almost any measure.

Also, its valuation looks more stratospheric when considering its price-to-book ratio of 43. With AMD and Qualcomm selling at 4x and 7x book value respectively, Nvidia may have trouble justifying its huge premium.

Moreover, investors tend to turn sour on slow-growth stocks, even when the pace of growth is robust. This may not be correct, but the truth is that triple digit growth figures are unsustainable in the long run. Customers are also likely to turn to the company’s competitors’ slower but available AI chips as Nvidia struggles to meet demand.

Additionally, investors need to keep Nvidia’s stock history in mind. Despite gains of more than 20,000% over the past 10 years, the stock has also fallen more than 50% twice in that time.

NVDA data by YCharts.

Such sales tend to occur because the chip industry and its stocks move in cycles. While this stock’s upward moves have rewarded shareholders handsomely, they have also had to endure brutal selling. With Nvidia likely in a bearish phase now, investors may want to wait until 2025 before considering adding shares.

The future of Nvidia stock

Given Nvidia’s momentum and its high valuations, investors should probably refrain from adding to the company’s stock in the final months of 2024. Of course, the AI ​​chip bull market isn’t over, and current shareholders should benefit in the long run remaining in stock.

However, both investor expectations and the stock price appear to have become too detached from fundamentals. Thus, investors should probably wait a few months before adding positions in Nvidia stock.