Chip maker Nvidia (NASDAQ: NVDA) The company’s stock price has recovered nicely from the sell-off that occurred in late July and early August. The stock price has risen from below $100 earlier this month to around $124 as of this writing. That’s a rise of about 25% in a very short period of time. Given the sudden volatility, investors who bought at the lows earlier this year or have been holding since much lower levels may be considering whether it makes sense to lock in profits and move on.
It’s not easy to know whether to sell shares at these levels. The company, which makes the graphics processing units (GPUs) that power the deep learning and artificial intelligence (AI) boom, trades at 74 times earnings, a steep premium. But Nvidia’s underlying fundamentals are astounding: Revenue rose 262% year over year in its most recent quarter, and earnings per share soared 629%.
Here, we take a closer look at both the bullish and bearish scenarios for the stock to help investors decide on their course of action.
The bull case
Investors who are bullish on the stock are quick to point out that the company’s impressive revenue growth is likely to continue for a while. Evidence of that, bulls say, is the fact that demand for the company’s flagship H200 and Blackwell chips is outstripping supply. NVIDIA Chief Financial Officer Colette Kress said in the company’s latest earnings call that she expects demand for those products “to continue to outstrip supply through next year.”
Additionally, NVIDIA bulls could point to the company’s fiscal second-quarter 2025 revenue guidance to signal continued growth. Management is forecasting second-quarter revenue of $28 billion, which means revenue could more than double and earnings per share growth could accelerate even further. Such momentum would likely help drive down NVIDIA’s lofty price-to-earnings (P/E) ratio quickly.
The bearish case
At the root of NVIDIA stock’s bear market is the fact that the market is forward-looking, especially when dealing with a stock that is trading at a high premium valuation. This means that Wall Street may punish NVIDIA stock harshly if it starts to show signs of future deterioration in revenue growth or profits. Thus, a simple comment from management on an earnings call that demand and supply for NVIDIA’s key products are approaching equilibrium may spook investors and lead them to believe that NVIDIA stock does not deserve as high a valuation as it is currently demanding.
Moreover, the high margins that currently seem to be NVIDIA’s strength are also what make it a weakness. For example, the company’s gross margins expanded significantly to 78.9% in the first quarter of fiscal 2025 from 66.8% in the same period last year. However, higher-than-normal gross margins mean that normalization could occur in the future as demand catches up with supply and competitors do a better job of manufacturing competing products.
In this environment, NVIDIA may be forced to lower the prices of its products and its margins may suffer, which could lead to a slowdown or even a decline in revenue.
Headwinds to Nvidia’s margins and revenue growth (if they materialize) could be a year or more away, but a forward-looking market could start pricing in these risks at any time.
Overall, Nvidia seems like a great company, but a risky stock at this price. It might be wise to sell the shares and buy something more attractive.
Should I invest $1,000 in Nvidia right now?
Before you buy Nvidia stock, consider the following:
The analyst team at Motley Fool Stock Advisor has identified 10 stocks that investors should buy right now, and Nvidia is not among them. The 10 selected stocks have the potential to generate big gains over the next few years.
Let’s look back at April 15, 2005, when Nvidia made this list… if you had invested $1,000 at the time of our recommendation, you would have $792,725.!*
Stock Advisor offers investors an easy-to-follow blueprint for success, with portfolio construction guidance, regular updates from analysts and two new stock picks every month. Stock Advisor The service is More than 4 times First S&P 500 recovery since 2002*.
View 10 stocks »
*Stock Advisor returns as of August 22, 2024
Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares in and recommends Nvidia. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
