Nvidia (NASDAQ:NVDA) has been the quintessential artificial intelligence (AI) stock for the past two years. The company’s dominance in the market for chips that power data centers used for AI has led to unprecedented growth.
The company’s stock price has risen more than 850% since the beginning of last year, and continues to rise as the company approaches its third-quarter earnings release.
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Investors considering putting new money into stocks are in a precarious position. I don’t blame anyone who feels they’re late to the game, but buying midway through has proven to be a smart move at this point. So, is Nvidia stock a good buy heading into earnings? Here’s what you need to know:
Historically, the average annual return for the overall stock market is around 10%, so NVIDIA’s big moves are rare and dramatic enough to feel like a bubble waiting to burst. . However, AI has created a unique situation around business.
Technology companies have fully embraced AI, creating perhaps the most significant growth opportunity since the early days of the internet in the late 1990s. Notably, a key element of the AI opportunity (the chips that power the AI) is being integrated into Nvidia, which holds the largest share of the market, estimated at 70% to 95%.
Below you can see that revenue and profit are increasing as well as the share price.
NVDA Chart
So why does Nvidia continue to rise? Simply put, the stock is still reasonably priced for its expected growth. Consensus earnings estimates continue to rise.
NVDA Revenue Forecast Graph for Current Fiscal Year
Analysts expect Nvidia to earn $2.82 a share this year, trading the stock at 50 times expected earnings. We also believe earnings will grow by an average of 35.6% per year over the next three to five years. It still trades at a price-to-earnings ratio (PEG) of 1.4x, a reasonable valuation given its expected growth.
Add in a compelling AI story, and Nvidia continues to look attractive, especially when compared to solid, mature companies with similar revenue multiples but much lower growth (I’m looking at you, Costco Wholesale).
All of this will work as long as Nvidia continues to live up to these high expectations. But the higher it goes, the higher the market expectations. The company beat Wall Street’s consensus revenue estimates by just 4.5% last quarter, its smallest profit margin since the AI boom began.
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The company is expected to report its fiscal 2025 third-quarter financial results in the coming weeks. The danger is that Nvidia will not be able to meet the market’s high expectations. Even if there is a shortage, it will likely be due to supply constraints rather than a slump in chip demand.
The company is moving away from its Hopper architecture (the wildly popular H100 chip it has been using) to a next-generation technology called Blackwell. CEO Jensen Huang spoke about Blackwell during the company’s previous earnings call, laying out plans for a production ramp-up that would begin in the fourth quarter and continue through Nvidia’s fiscal year 2026.
Huang emphasized that hopper demand remains strong enough that shipments will increase in the third and fourth quarters. Meanwhile, Nvidia has reportedly sold out of Blackwell’s supply for the next 12 months. Perhaps the most important news in the upcoming earnings call will be the latest guidance and commentary on how smoothly the company will be able to meet all this demand.
Nvidia faces customer concentration risk because a small number of large technology companies account for a large percentage of its revenue. Still, technology leaders like Microsoft continue to signal that they will continue buying chips in what is essentially an AI arms race.
That being said, stock prices can be very volatile. Any doubts about Nvidia’s growth trajectory could crush the stock, especially considering how many investors are resting on their laurels over the past few years. This is tough because on a fundamental level it still remains affordable and with AI leadership it’s hard not to like this company long term (5+ years).
So what could be the solution? Investors should take a slow and steady approach, using dollar-cost averaging and buying small amounts on a schedule. This way, if prices continue to rise, you will have inventory and the cash to take advantage of better buying opportunities when they arise.
Nvidia is at higher risk at these higher levels, but long-term vision and planning can help manage it.
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We currently have “double down” alerts on three great companies, and we may not see an opportunity like this again anytime soon.
See 3 “Double Down” stocks »
*Stock Advisor will return as of October 28, 2024
Justin Pope has no position in any stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale, Microsoft, and NVIDIA. The Motley Fool recommends the following options: A long January 2026 $395 call on Microsoft and a short January 2026 $405 call on Microsoft. The Motley Fool has a disclosure policy.
Is Nvidia a buy? Originally published by The Motley Fool
