Looking Beyond NVIDIA

 

Despite the large, headline-making drop, NVIDIA’s price-to-earnings (P/E) ratio remains high, a reminder that markets continue to price in high future cash flow or lower expected returns—or a combination of both. As of January 28, NVIDIA had a P/E ratio of 51, nearly double that of the S&P 500 Index at 28. 

 

The market is a competitive place, and the rout of NVIDIA—even if it proves to be short-lived—is a good reminder that even high-flying companies can stumble when investors’ expectations change. While large technology companies have seen strong returns in recent years, NVIDIA’s recent drop should remind investors to be cautious about putting all their chips in one “magnificent” pot.