Nvidia (NASDAQ:NVDA) stock is one of the great positions in my retirement account. I got in about two years ago at $150/share. It opened on July 14 at $816.02.

Nvidia is due to split 4:1 on July 20. Shares are up 35% since the split was announced although we all know that, financially, it’s a non-event.

At its July 14 closing price, Nvidia has a market cap of $508 billion. Intel (NASDAQ:INTC) (which I also own) is worth $232 billion, less than half that. Nvidia doesn’t really make chips, it just designs them. Why, then, does it carry twice the value of America’s biggest chip manufacturer?

Nvidia Assumptions

Moore’s law holds that chips grow more efficient over time. Moore’s second law holds that they get more expensive to fabricate along the way. As a designer, Nvidia gets the benefits of Moore’s law. As a fabricator, Intel gets its drawbacks.

Nvidia’s rise is tied to the success of its manufacturing partner, Taiwan Semiconductor (NYSE:TSM). TSMC, as it’s known, has been crushing Intel on manufacturing technology. It makes chips with lines 7 nm apart and has a road map to reach 2 nm. Intel, by contrast, is still trying to master the 10 nm process.

The value of hardware lies in software, and Nvidia has the best software. It has achieved this by focusing on graphics, first for gaming consoles, then for Bitcoin mining, and now for data centers. But what really has investors rushing to name their dogs for it is its pending purchase of Arm from SoftBank (OTCMKTS:SFTBY). Arm designs have been winning market share from Intel’s x86 for years. Apple (NASDAQ:AAPL) is just one of the companies that has standardized on them. Businesses operating in the cloud can bypass Intel by licensing the Arm designs, tweaking them to their advantage, and having TSMC make them.

The market’s assumption is that this squeeze on Intel will continue, and even accelerate, once Nvidia owns Arm. For Arm, which is based in England, the deal has been better than going public on its own.

Any Clouds?

The only problem with this is that chip capacity is currently constrained, with the industry dependent on China. Both TSMC and Intel are now building huge new plants in Arizona to alleviate it.

But even this cloud has a silver lining. Prices for Nvidia gaming cards continue to defy gravity. How long they can it do this is a question. Chinese crypto-miners are now selling their gear since China banned them.

The other cloud is Nvidia’s valuation. A market cap of $508 billion on sales of under $20 billion is preposterous. This is true even if a quarter of the sales revenue hits the net income line. Revenue continues to grow annually, but the market is assuming the Arm purchase puts Nvidia sales into overdrive. Again, Arm is not a manufacturer.

The Bottom Line on NVDA Stock

This is a good time for investors to hedge their bets.

Nvidia’s valuation is stretched. Any catalyst from acquiring Arm, whose purchase has yet to be approved by regulators, is in the shares. The chip shortage has begun easing. Intel is not completely out of the race.

Right now, all but one of the 27 analysts following Nvidia are saying buy it, even though their price target is 3% below its current price. Even their highest price target, $1,000, is just a 23% gain from here.

You don’t have a profit until you sell something and put the cash in your pocket. Nvidia has hit a peak valuation, and it may make sense to take some of that profit before the split goes through. Get out of NVDA stock at this high price.

— Dana Blankenhorn

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Source: Investor Place