The momentum behind Nvidia (NASDAQ:NVDA) stock seems unstoppable these days, with the stock now up 58% year to date. Although I am a huge fan of the graphics card maker/AI computing company, the valuation is way too rich for my liking, even considering the firm's incredible growth prospects.
Moreover, there are potential risks that investors keen on chasing the name should be aware of before paying up the premium price tag commanded by Mr. Market. Until the risk/reward improves, I remain neutral on NVDA stock. (See Nvidia stock charts on TipRanks)
Nvidia Keeps Raising the Bar
Nvidia blew away another round of earnings results in late August, with second quarter Fiscal 2022 results that easily topped Wall Street expectations, thanks in part to some pretty pronounced strength in gaming and data centers. Management also gave investors a jolt of euphoria by pointing to more strength ahead.
With a slew of exciting new products that will be slowly coming out of the pipeline over the years to come, Nvidia makes a strong case for why it can continue its winning streak and market-crushing returns for investors.
CEO Jensen Huang is one of the most brilliant minds in Silicon Valley, and it is worth paying up a massive premium for him; he's an incredible manager, and it's an absolute mistake to bet against him. That said, with Nvidia stock now trading at around 74 times trailing earnings and over 25 times sales, the premium is becoming quite excessive.
Furthermore, after another glorious "beat and raise," the bar has been set really high, such that anything less than perfection may be unlikely to move the needle significantly higher on NVDA stock.
Potential Risks to Nvidia's Epic Rally
Undoubtedly, avoiding Nvidia solely because of its high valuation metrics would have caused you to miss out on the stock's epic rally over these past few years. Given the magnitude of multiple expansion and the pricing in of many years worth of innovations, it's tough to see any margin of safety with the stock at these heights.
Moreover, unforeseen headwinds could present themselves ahead of NVDA stock. Most notably, a continued reopening of the economy could weigh on the gaming industry and result in modest results in Nvidia's gaming segment over the medium term.
In addition, another vicious sell-off in the cryptocurrency markets could hurt demand for hardware used for mining. Although it is worth mentioning that Nvidia prefers its chips to be used by gamers rather than miners, recent demand has been nothing short of overwhelming.
Wall Street's Take
According to TipRanks’ consensus analyst rating, NVDA stock comes in as a Strong Buy. Out of 25 analyst ratings, there are 23 Buy, 1 Hold, and 1 Sell recommendations.
As for price targets, the average Nvidia price target is $238.81. Analyst price targets range from a low of $185.00 per share to a high of $300.00 per share.
The Bottom Line on NVDA Stock
It's hard to not love Nvidia after yet another beat and incredible demand for its RTX line of hardware. It's firing on all cylinders these days.
Yet, just how long the company's streak of topping on earnings is anyone's guess. Regardless, I'd be more inclined to wait for a pullback in the name, rather than chasing it higher.
Although analysts remain overwhelmingly bullish (it's hard not to be), the consensus price target implies just 15% worth of upside from current levels.
Disclosure: Joey Frenette doesn't own shares of any mentioned companies at the time of publication.
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