It is abundantly clear that we are at the beginning of an artificial intelligence (AI) revolution. There's a very good chance that AI will have as large an impact on our future as the industrial revolution or widespread adoption of the internet did.
As machines get smarter and we are better able to automate tasks that either used to be impossible or required major human intervention, there's no telling what new capabilities will arise. Even with that reality, there's one artificial intelligence stock I wouldn't touch with a 10-foot pole right now. That stock is actually one that has been among the biggest winners of the AI revolution so far, Nvidia (NVDA 3.28%).
NASDAQ: NVDA
Key Data Points
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Have I lost my mind?
To be clear -- it is obvious that NVIDIA has an incredible early mover advantage when it comes to AI hardware today. It's also clear that Nvidia is not resting on its laurels when it comes to designing and delivering next-generation AI-related hardware .
The challenge that's keeping me away from Nvidia's shares today has nothing to do with its business or its prospects, it's the company's valuation. Nvidia's shares are trading at a level that requires it to deliver spectacular growth for years to come, just to justify the price it already commands in the market.
In my mind, the best time to have bought Nvidia would have been that brief window between the cryptocurrency bust and the start of the AI boom. At that point, around September of 2022 , Nvidia's shares were trading based on its prospects as a key hardware designer, rather than as the core picks-and-shovels play of the AI revolution.
Can Nvidia continue to thrive? Yes.
Will its operations continue to grow as AI gets more embedded in our everyday lives and jobs? Probably.
Will today's new investors be rewarded for the risks they're taking by putting their money in Nvidia's shares? Well, that's where I'm having trouble justifying a purchase.
Nvidia may be "the one that got away"
For a sense of why I'm nervous, analysts expect Nvidia to earn about $20 per share in 2025, after an estimated $11.50 per share in 2024. Overall, those same analysts are expecting the company's earnings to nearly double each year for the next five years.
If the company delivers earnings growth in line with those prospects over the next few years, then its recent market price above $725 per share may be justified. Yet to deliver that kind of consistent earnings growth over that long a period of time, Nvidia will need to continue to pump out more and more hardware, at higher and higher margins.
On top of that, the market generally tries to be forward-looking when valuing a company. So it's not enough for Nvidia to simply grow like wildfire over the next several years to justify its current market capitalization. It then needs to at least maintain those higher earnings over time to keep its stock price from falling.
If you take a step back away from the AI-related hope, Nvidia has a history of being cyclical. Even if Nvidia benefits from the build out of AI-related infrastructure, the company would face a natural slowdown when that growth turns into maintenance after that infrastructure is built.
And of course, competition won't sit there and let Nvidia own the entire global AI computing infrastructure. Even if that competition isn't as good as Nvidia in the AI space, it just has to be good enough to provide an alternative for its customers. That would put a dent in Nvidia's margins to make it that much harder for Nvidia to see the massive, sustained profit growth that analysts are already expecting from it.
Put all those factors together, and Nvidia may very well turn out to be the stock that got away from me. At this point, I'm willing to watch it from the sidelines and wish its shareholders the best.
Tread carefully if you choose to invest
Of course, as someone who follows a value-focused investing strategy, I have a tendency to be a bit late to the investing party when it comes to brand new, world-changing trends. While it means I rarely participate in the booms from those innovative trends, it also means that I am frequently in a reasonable spot to ride out the busts that frequently follow.
On one hand, today's investors in Nvidia may be rewarded for buying its shares early enough in the growth stage of the AI revolution. On the other hand, they may find themselves bag holders owning near the peak of a cyclical high point. If the outcome were knowable for certain, there would never be massive moves in the market when companies post surprise changes in earnings or guidance.
With that uncertainty the only thing that's truly clear when it comes to Nvidia's share price, investors should tread carefully. If things do end up poorly for its shares (even if the business continues to thrive), you don't want so much at risk that you'll wind up financially devastated.
