Nvidia (NASDAQ:NVDA) stock has regained some positive momentum in recent weeks. Indeed, it has surged upward from around $400 to flirt with the $500 level once again. However, as we’ve seen several times over the past year, NVDA has repeatedly gotten rejected and sold off each time it reaches this crucial technical and psychological price point.
Sentiment remains mixed on NVDA stock currently, though most analysts and investors do lean bullish overall. As I’ve noted in my previous articles on Nvidia recently, I continue to believe the stock is entering a period of consolidation and plateauing — a “cooldown” phase, so to speak — before its next major leg higher.
As a result, I view NVDA stock as quite risky to buy at current levels due to the correction potential. However, I wouldn’t recommend selling or shorting it either for investors who already own it. Sometimes, the best move is no move.
Now, for NVDA investors trying to play this latest surge and bulls looking to take on the risk and buy NVDA stock around $500, let’s explore the key question: What upside realistically lies ahead if Nvidia can finally break above $500 convincingly this time?
Valuation Already Reflects Many Years of Perfect Execution
First, it’s important to examine the sheer scale of Nvidia’s valuation. The incredible hype and promise surrounding artificial intelligence (AI) chips has propelled NVDA to a staggering market capitalization surpassing $1 trillion. And many Wall Street analysts seem convinced even more upside lies ahead.
However, at these nosebleed valuation levels, it seems patently unrealistic to expect that Nvidia — or any mega-cap company — could double or triple again from here any time soon. Ample evidence suggests a huge component of the buying in NVDA recently stems heavily from positive momentum and bullish sentiment rather than fundamentals.
After all, Nvidia currently dominates the AI chip space. So it’s understandable many growth investors have been willing to pay a steep premium for NVDA stock. However, I expect mounting competition to start biting into Nvidia’s share of the overall AI chip market. This should pare away a considerable chunk of its valuation premium.
Additionally, when you purchase NVDA stock at around $500, you are essentially paying today for many years — potentially over a decade — of projected rapid growth upfront. But this growth remains dependent on sustained optimism and euphoria around AI technology as a whole. And, of course, no one can accurately predict whether AI will truly become consistently profitable or deliver on its immense hype any time soon.
To illustrate this point, Nvidia currently trades at an eye-popping 22x forward sales. And even if we take all of Wall Street’s optimistic estimates and forecasts at face value, NVDA would still trade around 6x the estimated 2033 sales figures based on its current valuation.
Meanwhile, Nvidia’s estimated forward price-to-earnings (P/E) ratio sits around 12x based on hopeful 2033 projections. This implies the stock market expects absolute flawless execution from Nvidia’s management team for many years without any stumbles or disappointments. In my view, this makes owning NVDA stock at current levels an inherently risky bet on perfect foresight.
Why Competition Could Cut Into Nvidia’s Valuation, Margins
As I’ve noted previously, I seriously doubt Nvidia can maintain its massive margins and premium valuation indefinitely, especially as rivals like Advanced Micro Devices (NASDAQ:AMD) and Intel (NASDAQ:INTC) continue making R&D investments to catch up in the AI chip space.
I find it challenging to believe Nvidia can realistically earn around $41 per share in annual profits a decade from now, as many bullish analysts forecast based on today’s expectations. As with most segments in semiconductors, we will likely witness meaningful competition emerge that cuts into Nvidia’s leadership position and best-in-class profit margins on AI accelerators over the next five to 10 years.
Nvidia clearly possesses an impressive lead today in AI chips — there’s no doubt about that. However, competitors will inevitably gain ground over the next decade. In addition, the extreme supply shortages that have allowed Nvidia to charge eye-popping prices for its AI chips should taper as production capacity expands and demand rationalizes when the current AI hype wave eventually cools off.
Most importantly, remember that AI still remains in its early nascence, with many startups and projects burning significant cash without clear visibility to eventual profitability as of today. If the torrent of money flooding into AI startups starts to decelerate as the hype cycle peaks, these AI companies will likely become much more prudent about their spending habits. This would directly impact demand and pricing for Nvidia’s costly AI chip offerings.
A More Realistic Five-Year Price Target for NVDA Stock
To summarize, I do think Nvidia stock could break above $500 if the overall stock market and broader sentiment trends remain relatively cooperative. NVDA tends to move in sympathy with high-growth tech stocks.
However, I believe the downside risk substantially outweighs the potential upside left. I view the risk-reward balance as skewed negatively up here above $400, though timing any corrections remains difficult.
So let’s say the stars align perfectly for Nvidia over the next five years — AI transforms society and enterprise in unprecedented ways, rapid hyperscale adoption persists, and competitors like AMD and Intel fail to gain any traction in AI chips.
In this blue-sky scenario, I could envision NVDA stock reaching around $1,200 in five years. However, I would assign a low probability to this outcome.
Conversely, a more realistic and plausible five-year target seems to be around $600 on the low end or $800 on the high end. This assumes Nvidia hits a few speed bumps along the way and must contend with mounting competitive pressures in AI chips that sap away its pricing power and margins. Of course, anything could happen over a five-year period. But the risk-reward profile appears questionable currently.
My Verdict on NVDA Stock
In summary, while Nvidia’s long-term prospects still appear strong, its premium valuation bakes in many years of flawless execution. And it leaves little room for error over the next decade if management stumbles even once or twice.
Personally, I don’t believe the upside potential compensates for the downside risks at Nvidia’s current prices. However, I wouldn’t recommend completely selling or shorting it either since timing corrections remain difficult.
Instead, I suggest taking some profits off the table in tranches if you already own NVDA stock around $500. Hold a core position in case momentum keeps propelling it higher in the short term. But trim exposure prudently into periodic strength following parabolic rises.
The Bottom Line
Nvidia’s long-term prospects still look promising. But occasional stumbles could derail its uptrend, especially considering its steep valuation. Tread very carefully if NVDA stock tests $500 again soon. Of course, it’s impossible to predict Nvidia’s path over the next few years with absolute certainty, but the likelihood of a deep drawdown appears far greater at this stage based on my estimates.
On the date of publication, Omor Ibne Ehsan 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.