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As the poster child of the fourth industrial revolution and the artificial intelligence (AI) boom, Nvidia (NASDAQ:NVDA) stock has garnered fame and acclaim for its products over the past two years. In the early days, the enthusiasm was justified with innovative technologies offered by the company for processing specific types of information through their unique graphics processing units.
Following a remarkable surge of over 520% since 2022, Nvidia soared to unprecedented heights. However, as gravity dictates, what goes up must come down. The current levels of sales and revenue driving Nvidia stock are unsustainable in the long run, especially in the event of a market downturn.
Moreover, overvalued stocks like Nvidia would be the first to be offloaded in times of market turbulence to secure funds, highlighting the vulnerability of such high-flying investments.
Navigating Nvidia’s Record Numbers
For the better part of 25 years, Nvidia experienced steady growth driven by the sale of its GPUs mainly for personal computers requiring high-performance graphics capabilities. However, it was in the late 2010s and early 2020s that Nvidia’s prowess as a tech firm truly shone. Its expertise in computing methods made it indispensable for specialized applications like data centers, propelling its growth.
Today, with the increased demand for data center services driven by the computational needs of complex AI models, Nvidia’s linear processing-capable GPUs have found an essential place in AI development. Yet, this surge in demand is likely to wane once the AI race concludes, leading to a decline in need for data center technology.
The Flawed Path of Fabless Dominance
Nvidia’s dominance in hardware sales despite not manufacturing the hardware it sells is a noteworthy achievement. By adopting a fabless design model, Nvidia avoids the complexities of manufacturing by outsourcing to countries like Taiwan, ensuring cost-effectiveness.
However, this model exposes Nvidia to geopolitical risks beyond conventional market challenges. Former President Donald Trump’s remarks about Taiwan’s defense financing triggered concerns among investors regarding the susceptibility of the semiconductor industry, contributing to a dip in Nvidia’s stock value.
The Long-Term Growth Conundrum
With looming revenue challenges and supply chain vulnerabilities, Nvidia’s future growth prospects appear less promising. In response, the company is shifting towards monetizing its services around hardware, focusing on AI data center software and GPU customization technologies.
Considering Nvidia’s overvalued position, with a price-to-earnings ratio of 65.71x and a price-to-book ratio of 57.13x, investors may find more growth opportunities elsewhere in the future, making now an opportune time to consider selling Nvidia shares.
This cautionary advice is not rooted in panic but in practicality, urging investors to maximize their potential returns beyond Nvidia’s peak in the coming years.
On the date of publication, Viktor Zarev did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.