Stock Market

Nvidia (NASDAQ:NVDA) stock is what any logical investor would refer to as a red-hot property.

The company’s share price has rocketed higher this year, as the company boasted 100%+ year-over-year revenue growth, to more than $13.5 billion. Its shares have surged approximately 230% this year, a remarkable feat in this uncertain market.

Among the high-growth, high-momentum tech stocks out there, Nvidia is probably the most divisive. There are staunch long-term bulls that are unlikely to sell this stock at any price. There are value investors who may look at Nvidia’s valuation and get vertigo.

Then there are traders and momentum investors in the middle looking to ride waves higher and lower.

I think right now, NVDA stock is one to be traded, and it’s a difficult one to hold a long or short position on. Here’s why I think investors may want to be careful taking a position on Nvidia (on either side).

The Debate About NVDA Stock

Nvidia, a closely watched stock, attracts both bullish and bearish viewpoints on its future direction. The bullish case for NVDA, though somewhat fueled by hype, primarily rests on solid ground.

The company’s dominance in producing GPUs for AI applications was evident in its recent earnings report.

The company seems set for a swift rebound, driven by strong AI demand even as non-AI chip usage remains subdued. If non-AI business also revives, as some analysts predict, earnings growth could surge significantly soon, potentially supporting further price increases for NVDA.

However, bearish perspectives present a compelling case too. They argue that Nvidia’s valuation (50.8-times forward earnings) already incorporates substantial AI-driven growth, leaving shares susceptible to a significant correction when the “AI bubble” eventually deflates.

As with all economic bubbles, it’s not a matter of “if” but “when” it bursts.

The Bull Case

Nvidia’s breakthrough comes with artificial intelligence. Building AI models demands processing enormous data, causing the most potent tools: graphics processing units (GPUs).

Nvidia produces top-tier GPUs, and companies setting up AI-driven data centers acquire thousands of these GPUs to amplify their capabilities.

Nvidia stands to gain from the AI competition, being a primary choice for clients initiating AI capability because of its GPUs.

The fiscal 2024 second quarter was strong, but the third quarter looks even better, with an expected revenue of around $16 billion, marking a 170% year-over-year growth. Nvidia can command premium prices for its high-demand products, significantly boosting its gross profit margins.

The Bear Case

The key question is the longevity of AI-driven demand. Nvidia experienced demand and subsequent decline in GPU mining for cryptocurrencies.

AI appears more enduring, but it’s uncertain how many data centers are needed. Once a company builds an AI-powered data center, will it build more?

The answers are elusive because the full impact of AI on businesses remains uncertain. While it could be transformative, some customers may be content with their existing supercomputing infrastructure.

The timeline for AI demand’s sustainability remains uncertain. While caution is warranted, don’t underestimate the potential for a paradigm shift.

For investors, prudence is key. Nvidia’s future revenue trajectory post-initial AI demand is uncertain. Diversify your portfolio to manage risk and capture potential gains. It’s wise to secure profits while preserving the upside.

Nvidia’s market role is intriguing, but requires vigilant monitoring because of its unpredictability.

The Bottom Line on NDVA Stock

If AI enthusiasm persists this summer, NVDA might face challenges surpassing its current price levels in a bearish market. A less risk-seeking stock market may not enthusiastically “buy on the rumor, buy more on the news” during Nvidia’s late-summer earnings report, potentially leading to subdued post-earnings performance.

The stock might stabilize at current prices as the company aligns with its valuation. In a less risk-tolerant market, Nvidia could face downward pressure, lowering its price.

In summary, Nvidia has outsized growth potential, but comes with a caveat. For its rally to persist, market sentiment must remain stable post-Fed interest rate decision, following the initial boost from the secular growth trend.

On the date of publication, Chris MacDonald 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.

Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.

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