There’s no denying that Nvidia (NASDAQ:NVDA) is a darling of the markets. One fund manager who you will probably recognize reportedly increased his stake in NVDA stock. Does this mean you should buy it, too? Not necessarily, as the weighing machine of the stock market could bring Nvidia back down to earth soon.
Artificial intelligence (attached a sky-high value to Nvidia. Still, it’s interesting when a well-known financier loads up on a stock, so let’s delve into the details now.) is red-hot right now, and Nvidia manufactures microchips that can supply the intense power that generative AI applications require. Yet, I’m issuing another warning that the market has already
Which Famous Fund Manager Bought NVDA Stock?
While perusing through Larry Ramer’s excellent list of seven stocks that billionaires are buying now, I had a funny feeling that Nvidia would be somewhere on that list. Lo and behold, my inkling was confirmed as Nvidia is indeed on Ramer’s list.
Reportedly, Stanley Druckenmiller’s hedge fund, Duquesne Family Office, increased its position in NVDA stock. To be more specific, Druckenmiller’s fund raised its stake from about 583,000 to 791,000 shares in the first quarter of 2023.
Fund managers don’t always reveal why they invest in stocks. However, Druckenmiller reportedly stated that Nvidia is “already making the top coders seven or eight times more productive than they were five months ago.” Moreover, “If it’s as big as I think it is, Nvidia is something we’re going to want to own for two or three years, not 10 months, and maybe longer,” Druckenmiller added.
I’ve never thought of “two or three years” as an especially long investment horizon, but Druckenmiller’s point is duly noted. Nvidia’s generative-AI-compatible chips are best in class — this I won’t dispute.
Too Much Love for Nvidia
The problem is that an ultra-efficient market already understands Druckenmiller’s point. Out of 36 analysts, 32 of them have a “buy” rating on NVDA stock, four have a “hold” rating and there are no “sell” ratings whatsoever.
Morgan Stanley analyst Joseph Moore is typical, as he recently reaffirmed his “overweight” rating on Nvidia shares and raised his price target on the stock from $450 to $500. With that, Moore declared, “We see Nvidia as the cleanest story in AI hardware and believe it continues to deserve more consideration from investors looking for AI exposure.”
Hold on a minute. I won’t deny that Nvidia is a “clean” story in AI hardware, but I can’t imagine the company getting (or deserving, for that matter) “more consideration from investors.” Nvidia’s GAAP trailing-12-month (price-to-earnings (P/E) ratio is an eye-popping 222.85x. Now, that’s what I would call “consideration” to an extreme level. For reference, the sector median P/E ratio is 25.56x.)
Meanwhile, some traders are celebrating Nvidia’s entrance into the $1 trillion market capitalization club. Is this something to celebrate, though? Bear in mind, market cap is a function of a company’s share price. It doesn’t factor earnings into the equation like P/E ratios do. So, think twice before jumping into a crowded trade with Nvidia.
NVDA Stock: Know What You’re Getting Into
Druckenmiller’s point about the dominance of Nvidia’s AI-compatible hardware is valid. On the other hand, it’s a known point and the market is extremely efficient.
To put it another way, Nvidia’s future success seems to be already baked into the share price. So, you don’t have to follow Druckenmiller, or follow the frenzied crowd, into a long trade with Nvidia. Personally, I recommend being cautious with NVDA stock and waiting for a 20% pullback before buying it.
On the date of publication, David Moadel 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.