Going parabolic. There's no better way to describe Nvidia's (NVDA 2.00%) stock performance since late 2022. Over the last 18 months, the chipmaker's shares have skyrocketed more than 7x.
Those jaw-dropping gains have led many investors to question how long Nvidia can keep the sizzling momentum going. The answer: Not for too much longer. Here's one irrefutable reason why Nvidia's stock gains will slow dramatically.
NASDAQ: NVDA
Key Data Points
It's simple
In 1986, the late economist Herbert Stein stated, "If something cannot go on forever, it will stop." This came to be known as Stein's Law. And it's unquestionably true.
Stein's Law applies to Nvidia. The GPU maker's share price can't continue rising at the rate we've seen over the last year and a half. Why do I make this claim? Simple math.
Nvidia's market cap currently stands above $2.2 trillion. If the stock continued to rise at the same pace as it has since late 2022, the company would be worth more than $16 trillion by the fourth quarter of next year. That amount is higher than the gross domestic product (GDP) of every country in the world except the U.S. and China, which had GDPs in 2023 of nearly $27 trillion and $17.7 trillion, respectively.
If Nvidia's shares somehow managed to continue vaulting higher at the current rate for another 18 months beyond 2025 Q4, the company's market cap would be in the ballpark of $117 trillion. That's greater than the entire world GDP last year of $104 trillion.
Regardless of how bullish anyone might be about the potential for artificial intelligence (AI), there's no way Nvidia's size will eclipse the global GDP within the next three years. The stock's momentum can't go on forever, so it won't. Thank you, Herbert Stein.
Slowing doesn't necessarily mean declining
Nvidia's stock gains will slow dramatically in the not-too-distant future. However, it's important to understand that slowing doesn't necessarily mean declining.
Sure, some investors believe that Nvidia stock is a bubble waiting to burst. And that could happen. NYU finance professor Aswath Damodaran, one of the world's most eminent stock valuation experts, estimates that Nvidia's market cap is already more than twice its fair value.
It's not a certainty that Nvidia's share price will fall, though. One especially bullish Wall Street analyst thinks the stock can soar another 56% over the next 12 months. While that's significantly slower growth than what Nvidia has delivered recently, it's still quite good.
But that lone analyst's rosy price target for Nvidia is an outlier. The average price target among the 46 analysts surveyed by LSEG in March reflects the consensus that the stock is nearly at its ceiling for the near term.
Cathie Wood is right
Cathie Wood, founder and CEO of Ark Invest, cheered Nvidia for years. In 2023, though, she began reducing her funds' stake in the AI stock. That decision hasn't panned out so well for Wood since Nvidia's share price continued to rise. But while Wood's timing was off, I think her reasoning was right.
Ark Invest published a report in August 2023 that stated:
While we believe Nvidia is likely to remain a prime enabler and beneficiary of continued breakthroughs in AI, many other potential beneficiaries are not well understood, may sell at much lower valuations, and potentially could deliver significant revenue and earnings surprises on the high side of expectations.
I think that's the correct take. Nvidia will likely remain an AI leader for a long time to come. Investors who are looking for multi-baggers, though, can find other AI stocks with more room to run. Nvidia's days of going parabolic will end. It's irrefutable.
