Is Nvidia a Buy?

There is a strong case for purchasing Nvidia stock after its impressive rise of over 850%. However, buying recklessly could lead to significant risks. Here's a strategic approach for potential investors.

Nvidia (NVDA) has emerged as a leading player in the artificial intelligence (AI) sector, particularly over the past two years. Its stronghold in producing chips that power data centers for AI has propelled the company's growth to remarkable levels.

Since the start of last year, its stock price has soared more than 850%, continuing its upward trend with the third-quarter earnings report just around the corner.

Investors considering new investments in Nvidia may feel they are late to the party; however, those who have invested in Nvidia along the way have seen wise returns thus far. So, the question remains: Is Nvidia stock a wise investment right now? Here’s what you should know.

Reasons Behind Nvidia's Stock Surge

The broader stock market sees an average annual return of about 10%, making Nvidia's tremendous increase feel rare and potentially bubble-like. Yet, the growth driven by AI offers unique opportunities for the company.

Since technology companies have embraced AI, it is often compared to the explosive growth witnessed during the early internet days of the late 1990s. Nvidia has captured a significant share of this market, controlling between 70% and 95% of the chip market crucial for AI technologies.

The company’s revenue and earnings growth patterns have paralleled its stock price increase:

In line with this trend, Nvidia's momentum looks strong as the stock currently seems fairly priced relative to future growth expectations. Analysts predict earnings of $2.82 per share this fiscal year, meaning the stock trades at about 50 times this earnings estimate. Expectations are also for robust growth in the coming years, with an average annual growth rate of around 35.6% projected over the next three to five years. Currently, the price/earnings-to-growth (PEG) ratio stands at 1.4, which still indicates a reasonable valuation given its anticipated growth potential.

When evaluated alongside more mature companies with similar earnings multiples but lower growth prospects, such as Costco Wholesale, Nvidia undeniably remains appealing.

High Expectations from Wall Street

Nvidia's ongoing success relies heavily on meeting increased expectations from the market. With every new peak in stock price, the bar is set higher by investors. Notably, the company’s recent quarterly performance only exceeded Wall Street's revenue estimates by 4.5%, marking the lowest margin of outperformance since the AI boom began.

The upcoming third-quarter earnings report for fiscal year 2025 will be critical. Should Nvidia fail to meet these lofty expectations, it could largely be attributed to supply constraints rather than weak chip demand.

Nvidia is transitioning from its previous architecture (the highly successful H100 chips) to its upcoming technology called Blackwell. CEO Jensen Huang has mentioned that production ramp-up for Blackwell will commence in the fourth quarter and continue through fiscal year 2026.

Despite this transition, demand for Hopper remains strong, and shipments are set to increase. Importantly, Nvidia has reportedly already sold out of its Blackwell chips for the next 12 months. The most crucial points to monitor from the next earnings report will be fresh guidance and insights on how well the company can meet this demand.

Should You Buy Nvidia Stock? A Thoughtful Approach

Nvidia does face risks, particularly related to customer concentration, as a small number of large technology firms contribute significantly to its revenue. Nevertheless, leading tech players like Microsoft have consistently indicated strong demand for chips in what appears to be an intense AI arms race.

Yet, investing in Nvidia at its current highs could also bring volatility. Any uncertainty about the company's growth path could severely impact the stock, especially for investors who may have substantial profits from previous gains. Although Nvidia seems reasonably priced based on its fundamentals, its long-term prospects appear promising, particularly looking five years ahead due to its leadership in AI.

So, what can potential investors do to navigate this scenario? A sensible strategy would be to adopt a slow and steady approach. Consider using dollar-cost averaging to gradually purchase shares at regular intervals. This allows for some exposure to the stock in case the price continues to rise while retaining capital for better buying opportunities that could emerge later.

While Nvidia stocks carry more risk at these elevated levels, having a long-term investment horizon along with a deliberate plan can help manage those risks effectively.

Disclaimer: The author does not hold any positions in the stocks mentioned. This article aims to provide insights and is not investment advice.

Nvidia, Stocks, AI