Nvidia Faces Challenges as Investor Expectations Soar

When expectations are sky-high, even the best performers can struggle. This is the situation Nvidia (NVDA) finds itself in as the stock market's standout player.

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Just as top employees are expected to perform flawlessly every day, Nvidia is under immense pressure from investors. Unlike a motivational speaker's advice to embrace off days, Nvidia doesn’t get that luxury in the stock market.

Last week, Nvidia's soaring expectations became clear. On June 18, its market cap reached an incredible $3.34 trillion, surpassing Microsoft (MSFT) as the world's most valuable company. However, within three days, Nvidia’s market cap fell by $430 billion, without any major news causing the drop.

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To put that in perspective, Coca-Cola's (KO) entire market cap is $275 billion.

Some analysts suggest that investors were cashing in profits as the second half of the year began. Others speculate that new competitors might challenge Nvidia’s dominance in the future.

These possibilities highlight Nvidia's vulnerability to sudden drops in investor confidence, especially after its massive 3,000% growth over five years.

Sky-High Market Expectations

Currently, Nvidia’s stock is trading at 21 times its projected sales, up from 12 times just two months ago, as reported by Creative Planning’s chief market strategist Charlie Bilello. This is much higher compared to Microsoft’s 12 times and Apple’s (AAPL) 8 times, both of which are also performing well.

According to BTIG’s chief market technician Jonathan Krinsky, Nvidia's stock is trading about 100% above its 200-day moving average. For comparison, the widest spread any US company had above its 200-day moving average while being the largest company was Cisco’s (CSCO) 80% in March 2000, just before its peak. "Nvidia is truly in its own category," Krinsky said.

Similar Market Reactions

Micron (MU), another chipmaker, faced similar high expectations before its earnings report this week. Despite meeting guidance, Micron's stock fell due to overly optimistic predictions about AI demand.

Interactive Brokers’ chief strategist Steve Sosnick remarked, "When numbers should be sufficient to prevent a sell-off, or even spark a rally, it’s a bad sign that expectations are unrealistically high."

Differing Views on Nvidia

While some believe Nvidia’s stock is overpriced, others see long-term potential. "For medium- to long-term investors, Nvidia still looks strong given its booked capacity and solid pricing," said Chris Versace, co-founder of Tematica Research.

One thing is certain: Nvidia is a top performer in the market, and it won't be excused for underperformance.

Also Read: The Future of EV Stocks: Challenges, Investments, and Market Impact