The company’s shares have fallen recently, partly due to concerns that the AI bull market may be over.
Some market forecasters say Nvidia (NVDA 0.53%) As stocks rise, so does the artificial intelligence (AI) bull market. Wall Street has been enthusiastic about the company due to its dominance in the AI chip market. The company is a flagship for the emergence of large-scale language models and other AI techniques, arguably the biggest technological advancement since the development of the internet in the late 1990s.
Nvidia’s stock, which had soared for much of the past two years, has since reversed course. The stock is down about 22% from its June 2024 high. Buying rising stocks low has long been a successful investment strategy, and frankly, it’s hard to imagine the future of AI without Nvidia playing a key role.
However, you may want to consider these risks before buying shares today.
Nvidia looks cheap, but maybe there’s a reason for that
Nvidia’s AI-enabled GPU chips have become the go-to choice for technology companies building massive data centers to run powerful AI models. About $26.3 billion of Nvidia’s $30 billion in second-quarter revenue came from its data center division, which is essentially dedicated to AI chips. The good news is that data center revenue grew 154% year-over-year and 16% quarter-over-quarter in the second quarter, indicating that demand for chips remains strong.
Analysts currently expect Nvidia to earn $2.84 per share this year and $4 per share next year. Based on next year’s estimates, Nvidia has a forward price-to-earnings (P/E) ratio of 26. If Nvidia achieves 40% annual earnings growth over the long term, as analysts predict, now could be a good time to buy.
But there’s also the argument that Nvidia’s revenues, regardless of how impressive they ultimately will be, are too risky and investors may want a significant margin of safety before buying the stock. Nvidia’s revenues are driven by just a handful of companies. Specifically, four companies account for 40% of Nvidia’s total revenues. To make matters worse, all four of those companies (Microsoft, Meta Platforms, Alphabet, and Amazon) are working on developing their own custom AI chips.
Margins can be an issue
These companies won’t necessarily stop using Nvidia chips entirely (though that’s a possibility), but Nvidia has wielded surprising pricing power since the rush to AI began early last year, when AI has become a speed-to-market priority.
There are signs that the AI market is slowly evolving, with investors openly questioning whether big tech companies are earning the profits they need to justify spending heavily on data centers.
Traffic to ChatGPT, once the fastest-growing app of all time, has declined in recent months, according to market research, and Amazon executives said in the company’s second-quarter earnings call that AI customers are demanding better value.
Price wasn’t an issue when AI was new, but it’s starting to become a hot topic. This could put pricing pressure on Nvidia going forward. The company may be forced to choose between sacrificing market share to competitors or accepting lower profit margins to maintain its share.
This year, Nvidia is targeting gross margins in the mid-70s, something to watch beyond 2025. This high margin represents far more than any pre-pandemic levels.
NVDA Gross Margin Data by YCharts.
While it’s tempting to ignore these long-term concerns, it’s important to remember that Nvidia only looks cheap because everyone expects great sales and profits for years to come. A reversion of profit margins to their long-term averages would be disastrous for investors.
Should investors buy Nvidia stock today?
These concerns aren’t meant to discourage you from owning Nvidia stock; they’re raised to make you aware of the risks. Nvidia’s financials are impressive today, but they’ve been fueled by a few wealthy customers who are putting money into being the early winners in AI. Nvidia may be the leading AI chip company in 20 years, but its sales and profit margins could fall and its stock price could tank.
The tricky thing is, both could be true.
Long-term investors who want to buy shares during this dip should do so responsibly. Consider dollar-cost averaging slowly to accumulate shares. That way, volatility becomes an opportunity rather than a source of stress. Nvidia may remain volatile for the time being, even if it benefits investors in the long run.
John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and public relations at Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Justin Pope has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet, Amazon, Meta Platforms, Microsoft, and NVIDIA. The Motley Fool recommends long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
