Nvidia (NASDAQ: NVDA) achieved the remarkable feat of being the top-performing stock in the S&P 500 for both 2023 and 2024 to date. After an extraordinary 238.9% surge in 2023, the semiconductor giant continued its dizzying climb, adding another 41.6% in 2024. As of Feb. 7, Nvidia had amassed an astounding 379.7% gain since the close of 2022, catapulting its market value beyond that of venerable names such as Warren Buffett’s Berkshire Hathaway, electric vehicle pioneer Tesla (NASDAQ: TSLA), and fellow chip powerhouse Advanced Micro Devices.

However, amid the euphoria, investors are grappling with the crucial question of whether Nvidia can sustain its meteoric rise and if it presents a prudent investment opportunity at current levels.

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Nvidia’s Surge: A Historic Milestone

The market has seldom witnessed a surge of this magnitude from a company as substantial as Nvidia. Even Tesla’s remarkable 2020 rally, which saw it soar by 743.4% in a single year, pales in comparison to Nvidia’s ascent. From a market cap of $359.5 billion at the end of 2022, Nvidia has swiftly scaled to a staggering $1.73 trillion as of Feb. 7, presenting a monumental addition of $1.37 trillion in a little over 13 months — effectively double Tesla’s comparable achievement.

Nvidia’s market heft has surpassed all expectations, accounting for 4.1% of the value of the SPDR S&P 500 ETF Trust and a substantial 5% of the Invesco QQQ ETF. Such dominance has reshaped the market, intensifying its tech orientation to an unprecedented degree.

The Hazards of Transforming into a “Story Stock”

Undoubtedly, Nvidia’s financial performance is outstanding. The company has delivered outstanding top- and bottom-line growth, with an enviable operating margin of 46 cents in operating income from each dollar in sales. However, the critical concern revolves around the mounting pressure from investors. With a lofty price-to-earnings ratio of 92.6, Nvidia teeters on the brink of becoming a “story stock.”

A “story stock” represents a company whose valuation hinges entirely on future potential rather than its present reality. Tesla’s awe-inspiring 743% surge in 2020 is a pertinent example. Despite Tesla’s robust revenue and bottom-line expansion, its stock has languished, currently down by over 20% from its 2020 level, as investors prematurely priced in its promising prospects. Nvidia could mirror this trajectory, portraying extraordinary business growth while its stock flounders, having sprinted ahead of its fundamental underpinnings.

A Prudent Approach to Nvidia’s Soaring Trajectory

While the semiconductor industry and Nvidia bask in elevated demand, the stock’s current valuation aspires to perfection. This backdrop underscores the prudence of the Vanguard Growth ETF (NYSEMKT: VUG), offering investors an entry point into Nvidia’s ascent without bearing the full brunt of its market dominance. With Nvidia constituting 5.3% of the ETF, it commands a sizable yet manageable position, untethered to its singular performance.

The Nvidia Conundrum: To Buy or Hit the Brakes?

It’s been an unprecedented period for the “Magnificent Seven” stocks, a shorthand term for the titanic technology companies that make up a sizable portion of the Vanguard Growth ETF. This ETF, now trading at an all-time high, includes heavyweights like Apple, Microsoft, Nvidia, Alphabet, Amazon, Meta Platforms, and Tesla, which collectively command more than 50% of the fund’s weight. The ascent of its top components has propelled valuations to new and, some might argue, uncomfortably high levels. Yet, for a mere 0.04% expense ratio, investors can gain exposure to these megacap growth names, including the well-known Nvidia. This ETF offers a relatively modest approach to initiating a position in Nvidia without straining one’s portfolio. But is it a prudent move to pump the brakes on Nvidia, a company that has seen dramatic share price appreciation in recent times?

An Inflection Point

It’s time to address the elephant in the room. Given Nvidia’s recent stellar run, are prospective investors at risk of being left behind? It’s plausible that the company’s best gains are now behind it; in other words, the narrative of nearly quintupling an investment in just over a year may no longer be achievable. Save for buying into the Vanguard Growth ETF or a similar fund, the prudent approach to Nvidia at this juncture may be to merely hit the pause button and wait.

Should Nvidia’s fundamentals experience an uptick a year or two down the line, coupled with a stagnant stock price, it could well transform into an appealing value proposition. For now, it appears that numerous expectations have been prematurely priced into the stock, leaving it more vulnerable to substantial declines. This juncture might not be the ideal entry point for the discerning investor seeking value.

Timing the Nvidia Odyssey

Before considering an investment in Nvidia, it’s worth noting that the Motley Fool Stock Advisor hasn’t included Nvidia on its list of the 10 best stocks for investors right now. This catalog of stocks is predicted to unleash remarkable returns in the years to come, steering clear of Nvidia. The Stock Advisor service is a treasure trove of rich insights, furnishing a blueprint for investment success and dispensing regular updates from analysts, along with two fresh stock picks each month. Since 2002, the service has outperformed the S&P 500 by a margin of more than threefold.*

Is Now the Right Time to Invest?

Navigating through the news babble, a period of introspection seems prudent. The rapid ascent of Nvidia — and subsequently, other conglomerates — has undeniably irked investors into an introspective mode. With voices from the investment firm largely unsupportive of Nvidia, it might be worthwhile to heed this sentiment. Is this a marathon or a sprint — a time for prudence or indulgence? Perhaps embracing the tortoise mentality is in order as the Nvidia saga unfolds.

*Stock Advisor returns as of February 6, 2024

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Berkshire Hathaway, Meta Platforms, Microsoft, Nvidia, Tesla, and Vanguard Index Funds-Vanguard Growth ETF. The Motley Fool has a disclosure policy.