Shares of NVIDIA (NASDAQ:NVDA) recently dipped from their all-time highs after a CNBC report claimed that AMD's (NASDAQ:AMD) partner GlobalFoundries was developing an autonomous driving chip with NVIDIA customer Tesla Motors (NASDAQ:TSLA).

However, GlobalFoundries denied the report, and CNBC corrected its story, stating that CEO Sanjay Jha didn't "specifically say" that Tesla was its customer. Those conflicting reports caused tremendous volatility in NVIDIA and AMD shares, since NVIDIA is a market leader in driverless chips, while AMD has also expressed interest in expanding into automotive chips.

NVIDIA CEO Jensen Huang.

NVIDIA CEO Jensen Huang. Image source: NVIDIA.

Nonetheless, NVIDIA's swoon likely caused many investors to wonder if it's time to take some profits after the stock's 190% rally over the past 12 months. I don't think long-term investors should cash out of NVIDIA just yet, but I think new investors should wait for the stock to pull back before starting new positions. In my opinion, three main factors could cause NVIDIA's stock to drop in the near future.

1. The valuations

Analysts currently expect NVIDIA's revenue and earnings to respectively rise 30% and 41% this year. Those numbers look great, but they still represent a slowdown from its 38% sales growth and 138% earnings growth last year.

A stock's price-to-earnings ratio should generally be lower than the industry average P/E to be considered "cheap". If a company is growing rapidly, the P/E shouldn't be much higher than its earnings growth rate. NVIDIA looks expensive by both measures.

NVIDIA trades at 51 times trailing earnings, which is more than double the industry average of 24 for semiconductor companies. Its forward P/E of 46 doesn't look much cheaper. Both ratios are higher than its estimated earnings growth rate for the year.

The bulls will likely argue that NVIDIA deserves to trade at premium multiples based on the growth of its GPU and automotive businesses. However, the S&P 500 is hovering near all-time highs with a historically high P/E of 24, so a market downturn would still likely cause high multiple stocks with big gains -- like NVIDIA -- to fall very quickly.

2. Challengers on multiple fronts

NVIDIA's sales of gaming GPUs, data center GPUs, and automotive CPUs were robust in the past because they didn't face much competition. But looking ahead, NVIDIA faces much tougher competition across all those markets.

A resurgent AMD has taken aim at NVIDIA's GeForce GPUs with its next-gen Vega GPUs. The first batch of Vega cards, starting with the Radeon RX 64 and 56 desktop GPUs, are aimed at NVIDIA's current-gen Pascal cards. NVIDIA CEO Jensen Huang dismissed those threats, claiming that the Pascal would remain "unbeatable" for the "foreseeable future."

Servers at a data center.

Image source: Getty Images.

However, AMD plans to launch a second-generation Vega GPU, dubbed "Vega 2.0", to counter NVIDIA's next-gen Volta chips next year. We don't know exactly how the Vega 2.0 will compare to Volta yet, but with an unexpected upset -- like the one AMD's Ryzen recently pulled off against Intel (NASDAQ:INTC) in the CPU market -- NVIDIA's GPU sales could slow down.

AMD also recently launched data center CPUs and GPUs -- which could threaten NVIDIA's sales of high-end data center GPUs for machine learning purposes. On the automotive front, NVIDIA faces the possibility of AMD entering the market, as well as competition from Intel and Qualcomm (NASDAQ:QCOM).

3. Fading growth catalysts

The continued growth of NVIDIA's core gaming GPU business relies on gamers repeatedly upgrading their systems. This could become increasingly difficult as the graphical fidelity of current-gen PC games becomes tethered to their console versions and gamers stick with "good enough" GPUs. This cyclical trend is easy to spot if we examine the year-over-year growth of NVIDIA's GPU sales over the past few quarters.

 

Q2 2017

Q3 2017

Q4 2017

Q1 2018

Q2 2018

YOY growth

18%

63%

66%

49%

52%

Gaming GPU revenues. Source: NVIDIA quarterly reports.

Meanwhile, plunging cryptocurrency prices could cause interest in using GPUs for mining -- which some investors considered a potential revenue stream for NVIDIA -- to fade.

NVIDIA's still a great stock, but it's priced for perfection

I still think NVIDIA is a solid long-term investment. But I think investors who don't already own the stock should wait for a pullback before buying any shares. The market looks forward instead of backwards, and investors shouldn't dismiss the headwinds it faces in the data center, automotive, and gaming GPU businesses.

Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Nvidia and Tesla. The Motley Fool owns shares of Qualcomm. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.