Nvidia (NVDA +2.59%) stock has been giving back some gains lately as investors have started to pull away from high-flying tech stocks. It's still at a market cap of around $3 trillion, and Nvidia remains one of the top stocks in the world, but investors are definitely more apprehensive about buying the stock these days. While its growth opportunities are plentiful, determining a fair valuation for the stock can be difficult.
Is this recent pullback in Nvidia's stock price just a temporary setback for the chipmaker, and could now be a good time to invest in the business? Or is this a sign that Nvidia's stock has finally reached a peak and that more of a decline could follow in the near future?
NASDAQ: NVDA
Key Data Points
Is this just part of a broader tech stock slump?
A dip in price just isn't typical for Nvidia, which has been the ultimate growth stock to own over the past year and a half. Its sales have been tripling, demand continues to be strong, and analysts remain bullish on what lies ahead in the realm of artificial intelligence (AI).
In the past month, Nvidia's stock has declined by more than 3%. The Technology Select Sector SPDR fund has also been down more than 1% during this period, as it hasn't been just Nvidia that has seen a recent pullback -- other tech stocks have also been struggling. Amazon has declined by 1.5%, and Meta Platforms has fallen by 1%, as has Microsoft.
This recent bearishness doesn't appear to be limited to Nvidia's stock. And while these aren't huge declines, any sort of drop in value for Nvidia could ignite investor concerns, especially since this isn't a cheap stock to own.
Is Nvidia's stock too expensive?
A big reason investors haven't been too concerned about Nvidia's rising valuation up until now is that they know the company's sales and profits will soar due to a significant increase in demand for its AI chips and other data center products. In its first-quarter results for fiscal 2025 (which ended on April 28), Nvidia's net income skyrocketed from $2 billion a year ago to now nearly $15 billion. It's not too shabby for a three-month period.
That type of explosive growth can make it easy to justify paying such a steep premium for the business, knowing that the company's profits will be quite rich thanks to AI. But it's also unlikely that Nvidia will continue growing at such a high pace. In the meantime, investors still pay a hefty premium for the business.
At more than 70 times its trailing earnings, the stock is priced a fair bit higher than its 10-year average price-to-earnings (P/E) multiple of 57.
NVDA PE Ratio data by YCharts
Investors appear to be willing to pay more of a premium for the stock than they have been in the past, but those limits have been tested in the past (back in 2021 when the P/E multiple was north of 80) before the valuation would end up coming down.
A brief drop in price isn't indicative that there will be a similar pushback now, but it's a question that many investors are likely wondering about -- whether this may be the start of a much larger decline for Nvidia's soaring stock.
However, I wouldn't be overly concerned, simply because its earnings are still likely to climb far higher in the future. Even if the P/E multiple investors are willing to pay for Nvidia stock comes down a bit, an increase in the bottom line could offset that and help Nvidia's valuation rise higher in the end.
Is it too late to invest in Nvidia's stock?
I don't think Nvidia's stock has peaked simply because it's still a leader in the AI chip market. While there will be rivals down the road that will try to take some market share from Nvidia in the future, it has built up such a strong position that it could take a while before that happens. As long as companies continue to spend heavily on AI, Nvidia's results may continue to remain impressive in the foreseeable future, given its dominance in the industry.
Until there's a crack in Nvidia's armor that suggests demand is starting to waver or there's an increase in competition on the horizon, this can still make for a good stock to buy and hold right now.
