Nvidia (NASDAQ: NVDA) stock might be the most watched in the world right now.

Nvidia’s chips are at the heart of the artificial intelligence (AI) revolution. And that helped push the market cap up above three trillion dollars.

It put it up with the likes of Apple and Microsoft.

But it’s fallen below that magic level now, at $2.63trn at the time of writing, after a weird week or so.

Earnings win

Nvidia’s Q2 earnings, posted on 28 August, once again beat estimates.

Revenue rose by 15% from Q1, hitting $30bn. That’s up 122% year on year. And earnings per share (EPS) climbed 12% from Q1, up 168% over the year.

So were the markets happy? Nope.

Nvidia stock fell, knocking $278.9bn off the market cap, for the biggest single-day fall ever recorded by a US company.

Since the results were out, the price has fallen 16.4%. That’s as of market close on Thursday (5 September). And as I write, it’s down a bit more in Friday’s pre-market trading.

Still a winner

But let’s get this into some perspective.

Nvidia has still gained 120% over the past 12 months. And it’s up a whopping 2,440% in the past five years.

Every £1,000 invested in the stock five years ago would be worth £24,400 today. Multi-baggers like that don’t come along very often in each investor’s lifetime.

So we’re not looking at a disaster here, at least if we’re not day-traders making big losses in the past week.

But what might come next? I’ve no doubt that AI could make great inroads into many aspects of our lives in the future. And I reckon AI stocks could reward shareholders very nicely.

Time

Amazon, Microsoft, Alphabet and Meta between them pumped $53bn into capital expenditure in the second quarter this year. That’s 60% more than a year ago.

But time can be key. And more and more people think that too much cash is being pumped into AI too quickly.

We’re seeing a rise in short-selling of AI stocks. So far, the shorters seem to be picking on what they see as second-rank prospects.

They’re the ones they think don’t deserve their high ratings, and are riding on the coattails of the big players.

But no matter what the headlines say today, I try to fall back on one thing above all. Valuation.

Valuation, valuation

Right now, the Nvidia price fall puts it on a price-to-earnings (P/E) ratio of 39. That’s based on forecasts, and they can easily go wrong. And we see a trailing P/E of 50, based on last year’s actual earnings.

But those same forecasts would drop the P/E as low as 24 by 2027. For a world-leading tech growth stock, that could be dirt cheap.

Competition in the chip world is very uncertain. And Nvidia and others have come under the eye of the US Justice Department as it probes potential antitrust law violations.

Because of these risks, but mainly because I avoid stocks that are caught up in sentiment, I won’t buy Nvidia stock now.

But I might do in the future, perhaps before not too long.