Nvidia's Stock Plummets: What History Tells Us About Future Trends

Nvidia's stock is experiencing a significant drop, and historical trends indicate a clear potential trajectory for 2025.

Recent days have seen a stir in the financial markets due to a new player in the artificial intelligence (AI) sector. A Chinese company named DeepSeek has generated considerable buzz by launching a model similar to ChatGPT.

This has raised concerns among investors, particularly because DeepSeek asserts that its model was developed using dated and less advanced chips from Nvidia (NVDA -3.67%). This claim has left many investors puzzled, forcing them to reconsider whether Nvidia's latest technology justifies its premium price.

The outcome has been a prolonged decrease in Nvidia's share price. Investors are now weighing whether this presents a chance to buy or if the stock could continue its downward trend.

In this article, I will explore some notable trends in Nvidia's stock and offer insights on its future direction.

Recent Movement of Nvidia Stock

The chart below reflects several declines in Nvidia's stock price after the announcement from DeepSeek. While such substantial drops usually speak volumes, there's more happening beneath the surface.

When a company's stock price fluctuates, the overall value of the company is impacted. In the case of Nvidia, its plummeting stock has led to a staggering loss of approximately $600 billion in market capitalization.

This situation appears dire at first glance. Yet, as is often the case with emotionally driven investments, there's more complexity here.

As Nvidia's market cap has fallen, so have its valuation multiples. Currently, Nvidia's forward price-to-earnings (P/E) ratio stands at 30.1.

Next, I will delve into why this drop in valuation multiples is significant and what historical data suggests may occur moving forward.

Insights from Historical Trends

The table below summarizes Nvidia's forward P/E ratios at the end of each quarter over the last year.

Category	10/31/2023	1/31/2024	4/30/2024	7/31/2024	10/31/2024	Current
Forward Price to Earnings (P/E)	24.5	30.4	35.7	44.6	33.9	30.1

Data source: Yahoo! Finance.

Nvidia's forward P/E ratio hovered around 30 last January. This is notable because, during that time, Nvidia's market cap was around $1.5 trillion, roughly half of its current value.

Given the similarity in Nvidia's forward P/E now compared to a year ago, one might speculate that Nvidia’s stock prices could rebound, as was the trend throughout 2024. While this is a possibility, historical trends alone aren't sufficient this time.

Critical Nuances to Consider

Since Nvidia's current forward P/E ratio matches its value from the previous year, despite the company's market valuation doubling, it implies that analysts on Wall Street anticipate Nvidia's earnings will also double.

On the other hand, if Nvidia's market cap has increased but its earnings remain stagnant, we would typically expect a widening of the forward P/E ratio, known as valuation expansion.

However, the situation with DeepSeek introduces uncertainty regarding the demand trends for AI infrastructure, particularly for graphics processing units (GPUs), which are essential to Nvidia's business.

Realistically, it would not be surprising to see some analysts adjusting their revenue and earnings forecasts for Nvidia. While this does not imply that Nvidia is overvalued, it's essential for investors to allow industry experts time to reassess the implications of the DeepSeek announcement and revise their forecasts accordingly.

In essence, Nvidia's current forward P/E—being almost identical to its level a year ago—should be viewed with caution, as earnings expectations are likely to shift, which could affect the relevance of the forward P/E ratio.

Nonetheless, I believe Nvidia will continue to play a pivotal role in the AI landscape, with its GPUs remaining vital for future technological advancements. Just how significant that role will be? That remains the critical question.

While historical analysis could suggest Nvidia's value might increase considerably this year, I advise careful consideration. I believe there remains substantial long-term potential in Nvidia stock, but expecting a doubling of shares in 2025 might be overly optimistic.

Nvidia, Stock, Trends