Nvidia's Stock Signals Techs Near Bubble Like 2000

Advanced semiconductor manufacturer Nvidia Corp. (NVDA) is a darling of tech stock investors, who have sent its shares rocketing to incredible heights. From its low closing prices in January 2015 and February 2016 (adjusted for dividends per Yahoo Finance), Nvidia's gains through February 2, 2018 have been nothing short of eye-popping, at 1,158% and 837%, respectively. Also, its shares have shot up so rapidly that its closing price on February 2 was 33% its 200-day moving average, per data from Nasdaq. Could all this point to a bubble in Nvidia stock? Yes, according to an earlier analysis by Investopedia. (For more, see also: Why Nvidia's Valuation May Be a Giant Bubble.)

Shades of Bubbles Past

With the rise of the internet in the 1990s, investors excited about the profit potential sent the technology-heavy Nasdaq Composite Index rocketing up by more than 400% from 1995 to 2000, a period known as the Dotcom Bubble years. In the subsequent Dotcom Crash that lasted into 2002, the Nasdaq plummeted 78%, giving up roughly all those gains. A number of high-flying tech startups went bankrupt in the process.

NVDA Chart

NVDA data by YCharts

While valuations in tech stocks today generally are nowhere near as giddy as they were during the Dotcom Bubble, they nonetheless are high by historic standards, raising fears that a new tech bubble has developed, with Nvidia being a prime example of overblown expectations. The forward P/E ratio for the technology sector of the S&P 500 Index (SPX) is 26.7 while that of Nvidia is an even loftier 53.6, per CNBC. Even some noted technology bulls now see the sector as overvalued. (For more, see also: Long-Time Tech Analyst Advises Sector Overvalued.)

Rosy Outlook for Growth

Today, these heady valuations combine with very rosy growth projections. For Nvidia, CNBC reports that consensus EPS estimates imply 11.4% growth over the next year, followed by 41.0% growth over the next three to five years. For the tech sector, the figures are 15.6% and 45.7%, respectively. During the Dotcom Bubble, the forward P/E for the tech sector as a whole neared a value of 50.

Beginning of the End?

To put Nvidia's 33% stock price premium versus its 200-day moving average in perspective, the S&P 500 closed February 2 at 9.0% above its own 200-day moving average, per Nasdaq. Moreover, 2009 was the last time that the S&P was 15% above that moving average, per Yardeni Research Inc.

Meanwhile, from its 52-week high of $249.27 reached on January 31, Nvidia has dropped 6.2% through the close on February 2. One factor has to be the general market pullback, which has sent the S&P down by 3.9% since its record close on January 26. It's anyone's guess, though, whether this represents the beginning of the end for the meteoric rise in Nvidia's stock, or just a profit-taking pause.

Take the Next Step to Invest
×
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.
Service
Name
Description