“Undervaluation” is a term about which one could write books and discuss forever. I’ll take a stance on this by slightly sidestepping that tricky term. My personal view is that the market’s focus, which shifts through rotation, is currently elsewhere. The image below shows Nvidia’s volume at the bottom as dark bars. Trading volume for Nvidia’s stock has slowed down.
The stock exchange is an auction, and price is formed through supply and demand. In most cases, an increase or decrease in volume leads to a corresponding move in the share price. When there is interest in a stock, it is traded, and when rotation shifts the market’s focus elsewhere, volume drops and the price falls. In Nvidia’s case, we are near the ATH (all-time high), i.e., even the rotation hasn’t really pushed the price down. Strong fundamentals are supporting the price. Nvidia is a good example of how, over a two-year horizon, it is precisely these market rotations (“fashion trends”) that influence the share price the most. Nvidia’s trading volume has shifted, for example, to its subcontractors, such as memory companies. And in this way, Nvidia has become undervalued in the eyes of valuation metrics. It is interesting to consider whether this undervaluation will resolve into increasing demand, i.e., rising trading volumes. Personally, I believe the undervaluation will resolve within a couple of years.