When analyzing Nvidia (NASDAQ:NVDA)you can probably forgive some investors for considering it overvalued. The stock has rallied 12x since its 2022 bear market low.

Its valuation and growth rate are fueling fears that it will fly too close to the sun and crash when its wings melt.

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Even its most ardent supporters will admit that it’s not a cheap solution. semiconductor stock. Still, saying it’s “too close to the sun” is probably an exaggeration, and here’s why.

The Nvidia revolution

Nvidia changed the face of the semiconductor industry with the release of an improved version of ChatGPT in early 2023. When observers saw that AI accelerators were driving the improved performance, the demand for these AI chips rose into the stratosphere, and Nvidia was the company best prepared to do it. respond to the request.

Therefore, this product fundamentally changed Nvidia. Three years ago, in the third quarter of fiscal 2022, the data center segment, which designs AI accelerators, contributed a lower share of revenue than Nvidia’s original business, gaming.

However, in the third quarter of fiscal 2025 (ended October 27), the data center segment accounted for 88% of revenue!

Indeed, competitors such as AMD, IntelAnd Qualcomm have strived to narrow the competitive gap. Since demand for AI accelerators exceeds supply, competitors have a market. Nonetheless, Nvidia’s innovation has allowed it to remain firmly ahead in this area. With this ability to stay ahead, it’s unlikely any of its competitors will catch up anytime soon.

Signs of Trouble for Nvidia Stock

You might assume that Nvidia flew too close to the sun upon taking a closer look at some of its results.

On the surface, they point to phenomenal growth, with third-quarter revenue of $35 billion, up 94% year-over-year. With this increase, its net profit of $19 billion increased by 109% over the same period.

Investors should keep in mind that larger companies tend to grow more slowly due to law of large numbers. Hence the fact that Nvidia can grow so much despite its 3.2 trillion dollars market capitalization is simply impressive.

Yet in the first three quarters of fiscal 2025, its revenue grew 135%. This led to an increase in net profit of 190%, indicating that a downturn had begun.

Triple-digit revenue growth isn’t sustainable, even for companies that are just a fraction of Nvidia’s size. Still, investors tend to punish stocks when those gains inevitably slow, which could happen to Nvidia.

And its valuation could contribute to the decline. A cursory examination of its stock may not indicate overvaluation since its price P/E is 52. Moreover, its price/sales ratio (P/S) of 29 is probably high, but not unusual for a high-flying tech stock.

But its price/book value (P/BV) ratio undoubtedly places the stock in bubble territory. Currently, Nvidia is trading at a book value multiple of 49, well above the P/BV ratios of AMD and its first manufacturer, Taiwan Semiconductorwhich sell for 3.6 times and 8.3 times book value, respectively. This massive premium could prompt more investors to sell the stock even as it continues to dominate AI accelerators.

Is Nvidia flying too close to the sun?

Although Nvidia is likely to experience some heat in the short term, it’s probably not too close to the sun.

Given the slowdown in revenue growth and the 49 P/BV, the stock’s price is undoubtedly ahead of itself. This could lead to difficulties or even outright declines in the short term and possibly beyond.

However, its massive growth is expected to increase Nvidia’s “heat resistance” over time. When its sales and book value multiples fall to a level more consistent with its growth and profits, the company will be able to fly at higher altitudes, probably higher than today.

So while Nvidia seems too close to the sun right now, investors shouldn’t expect that to be the case in the long term.

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Will Healy holds positions in Advanced Micro Devices, Intel and Qualcomm. The Motley Fool holds positions and recommends Advanced Micro Devices, Intel, Nvidia, Qualcomm and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: Short February 2025 $27 calls on Intel. The Motley Fool has a disclosure policy.