Has NVIDIA Stock (NVDA) Become the Market's Newest “Meme Stock”

24/7 Wall St. Key Takeaways:

• NVIDIA’s valuation largely rides on AI hype. Its P/E ratio of ~90 reflects immense growth expectations, similar to speculative meme stocks but grounded in real demand.
• Reddit skeptics warn that NVIDIA’s dominance and AI’s growth are uncertain, making NVIDIA’s future questionable. 
• Also, read “The Next NVIDIA.“

A recent Reddit post in the r/stocks community stirred up heated debate, claiming, “NVDA is a meme stock at this point.” The Redditor was questioning whether buying NVIDIA at its current valuation is rational. He mentioned the company’s financials, barely justifying the price. 

They also raised skepticism about NVIDIA’s assumed monopoly on AI, calling AMD a more reasonable choice for AI-focused investors. The post struck a nerve, igniting discussions about valuation bubbles and comparisons to notorious “meme stocks.”

So, has NVIDIA (NASDAQ: NVDA) really entered meme-stock territory? Let’s take a look.

What Is a Meme Stock, Anyway?

Meme stocks, like GameStop (NYSE: GME) and AMC Entertainment (NYSE: AMC), rose to fame thanks to retail investor hype. Often, this occurs despite the company’s underlying financials, and they usually have these characteristics:

• Trade at extreme multiples: Meme stocks often sport sky-high price-to-earnings (P/E) ratios or no earnings at all.
• Rely on narratives over fundamentals: Sentiment, not profitability, drives valuation.
• Have a cult-like following: Social media buzz and FOMO (fear of missing out) create massive volatility.

So, how does NVIDIA compare with these stocks?

NVIDIA’s Validation vs. Meme Stocks

NVIDIA’s stock surged over 200% in 2023, fueled by its dominance in AI chips. Currently, its P/E ratio is somewhere around 90, which is far above the S&P 500 average of 25(ish). While this multiple isn’t in GME’s stratosphere during its peak (infinite P/E due to losses), it is still clearly within bubble territory by historic standards. 

The Reddit Factor

Reddit (NYSE: RDDT) communities like r/WallStreetBets have played a pivotal role in labeling stocks as “meme stocks.” NVIDIA’s rise sparked debates on forums, with some seeing it as overhyped and others viewing it as the cornerstone of AI innovation.

Some make strong arguments against NVIDIA, like the post we’re discussing today. However, others argue that NVIDIA differs from a traditional meme stock because it has solid fundamentals and industry leadership. 

This mix of skepticism and enthusiasm reflects the power of social media to amplify sentiment.

The AI Narrative: Too Big to Fail?

What sets NVIDIA apart from traditional meme stocks is its growth potential. The AI boom has created genuine demand for NVIDIA’s GPUs, which power everything from ChatGPT to autonomous driving. NVIDIA has seen revenue increases. 

However, critics from Reddit still warn about things like:

• AI may not deliver the expected ROI: Right now, we’re assuming AI will make money. However, we don’t actually know this to be the case. AI adoption could face hurdles, or competitors could chip away at NVIDIA’s market share.
• Valuation assumes perfection: All that said, even slight performance drops could trigger a sell-off (a potentially very large sell-off).

Lessons from Meme Stock History

Investors who were burned by stocks like GME and AMC know how quickly sentiment can flip. The enthusiasm surrounding NVIDIA is very similar to GME’s rise, making many cautious.

Even though NVIDIA does quite fit the meme-stock definition, there are still some things we recommend watching out for:

• Meme stocks thrive on belief over balance sheets. NVIDIA’s fundamentals are better than some past meme stocks, but that doesn’t mean it’s perfect. 
• High multiples signal caution. GME traded at crazy levels, and NVIDIA’s 90 P/E isn’t anything to scoff at. 
• Sentiment shifts can be extremely unforgiving. AI could face disillusionment just as AMC fell after its movie-theater revival narrative faded.

Should You Buy NVIDIA Now?

Redditors betting against NVIDIA have valid concerns. NVIDIA could very easily be trading much higher than it’s worth. However, labeling it as a pure meme stock oversimplifies the story. NVIDIA’s valuation reflects a mix of legitimate growth potential and frothy speculation. 

For many investors, it comes down to a simple question:

• Do you believe AI will dominate? Then NVIDIA may be a long-term play. 
• Are you skeptical of AI’s pace and NVIDIA’s monopoly? Then NVIDIA might not be the play for you. 

As the Reddit post points out, AI’s and NVIDIA’s dominance “are two very big assumptions.” Whether NVIDIA joins the meme stock hall of fame or stays an AI leader hinges on how those assumptions play out.

You can learn more about our NVDA price prediction and forecast.