Nvidia (NVDA 2.91%) has been unstoppable. Its chips have been the preferred choice for video gamers for years, and now they are prized by the world's largest data centers. Over the last 10 years, the chipmaker's annual revenue has soared from $4.7 billion to $130 billion.
Nvidia stock's meteoric rise hit a roadblock this year as investors weighed the consequences of tariffs on chip demand, in addition to increasing competition and other risks. The stock was down 19% in the first quarter.
Demand for Nvidia's chips is still strong. Analysts are sticking with full-year revenue estimates that call for an increase of 57%, but the recent dip in the stock clearly reveals some investors doubting whether those targets are realistic in light of near-term headwinds. Should investors start a position while the stock is down, or take a pass?
NASDAQ: NVDA
Key Data Points
Weighing growth and risks
Nvidia is the dominant supplier of graphics processing units (GPUs) for data centers, which are used by all the leading cloud service providers. Its data center revenue jumped 93% year over year in the fiscal fourth quarter, with leading cloud services comprising about half of its data center business. Nvidia's new Blackwell computing system generated $11 billion of revenue in the quarter.
"We're going to have to continue to scale, as demand is quite high, and customers are anxious and impatient to get their Blackwell systems," CEO Jensen Huang said on the fiscal Q4 earnings call.
The stock's valuation looks very tempting, considering these demand trends. The shares trade around 24 times this year's consensus earnings estimate -- well below the stock's five-year average trailing price-to-earnings (P/E) multiple of 80. A low P/E for a high-growth business can often signal undervaluation and set the stage for significant gains.
One reason the stock is down is the potential for increasing competition. Nvidia's sky-high profit margin of 56% says it is pricing its chips at whatever the market can bear, which reflects its status as the main supplier for artificial intelligence (AI) chips. This is great for Nvidia's profits, but it could push some of Nvidia's customers to look for less costly alternatives. For example, ChatGPT model maker OpenAI is reportedly designing its own AI chips to lessen dependence on Nvidia.
Still, Nvidia has enormous resources to keep innovating to maintain momentum. Management said on the last earnings call that demand for AI inferencing is accelerating, driven by the popularity of models like OpenAI's ChatGPT.
Inferencing could be a big deal for Nvidia's business. This is where a computer can anticipate and complete a task without human input. It is the next stage of AI development, but it requires 100 times more processing power per task. Nvidia's Blackwell was designed to meet this requirement.
Why buy Nvidia stock?
Every company faces risks, and Nvidia is certainly facing its share. While the potential impact of tariffs on leading chipmakers is still unknown, pressure on the rest of the economy could spill over to the chip industry, which historically ebbs and flows with the economy.
Nvidia is also wrestling with chip restrictions in China, where sales of the company's data center chips are still well below the levels seen when chip controls were first put in place in 2022. However, China makes up a relatively small percentage of Nvidia's business.
OpenAI's ambition to make its own AI chips is a risk to watch, but Alphabet's Google and Amazon have been deep into making their own chips without hurting Nvidia's momentum. These tech giants remain two of Nvidia's biggest customers. There is not a viable replacement for the raw horsepower that Nvidia's GPUs provide for developing advanced AI models, training self-driving cars, and building humanoid robots.
Nvidia's recent earnings report shows that it is on course for another year of strong growth. It guided for fiscal Q1 revenue to be up roughly 65% year over year. While investors shouldn't ignore the risks, the stock is also offering solid value right now.
I would still buy the stock, but it's wise to size your position for the possibility that one of these risks manifests itself. When customers are impatient to buy the product, revenue is growing at high rates, and the stock is trading at 24 times forward earnings, it's a bargain. If Nvidia meets long-term earnings growth estimates of 35% on an annualized basis, the stock could soar in value over the next several years.
