Nvidia (NVDA +3.80%) stock has cooled off recently. After hitting a 52-week high of $212.19 in late October, shares closed out last week at $175.02 -- a decline of about 17%. This comes as sentiment around AI (artificial intelligence) has become less forgiving as investors demand clearer returns on the spending and look for evidence that the current AI boom can keep chugging along for the foreseeable future.
Nvidia, which sells the market-leading graphics processing units (GPUs) that power the data centers used to train and run AI models, has been a major beneficiary of the AI boom. But this means that it could also suffer if demand for AI computing suffers.
However, despite sentiment toward AI turning more negative recently, demand for AI chips remains extremely robust. So, is the stock's recent sell-off a buying opportunity?
Image source: Getty Images.
Demand is still rising
A glance at Nvidia's fiscal third-quarter results certainly doesn't show signs of the AI boom cooling off.
"Blackwell sales are off the charts, and cloud GPUs are sold out," CEO Jensen Huang said in Nvidia's fiscal third-quarter earnings release.
The tech company's fiscal third-quarter revenue rose 62% year over year to $57.0 billion. That was faster than the 56% year-over-year increase Nvidia reported in fiscal Q2. This marked a return to accelerating growth after fiscal Q2's top-line growth rate decelerated.
The data center segment, where most AI hardware demand sits, told a similarly bullish story in fiscal Q3. The segment's revenue grew 66% year over year in the third quarter to $51.2 billion -- up from 56% growth in the prior quarter.
Further, Nvidia's profitability continued to impress. Fiscal third-quarter operating income rose 65% year over year to $36.0 billion, and earnings per share climbed 67% to $1.30.
Looking ahead, Nvidia guided for fourth-quarter fiscal 2026 revenue of $65.0 billion, plus or minus 2%. At the midpoint, that implies about 14% sequential growth and roughly 65% year-over-year growth.
A great business, but a risky stock
For investors looking to get in on this growth story, the pullback in the stock price certainly helps. But the pullback may not be big enough to full price in some of the stock's biggest risks.
Shares currently trade at about 43 times earnings. A valuation multiple like this makes sense if Nvidia can sustain its rapid growth and maintain its high gross margin in the 70's. But if investors start go see signs that either of these important factors behind Nvidia's valuation is at risk, the stock could fall quickly.
The risk is not that Nvidia suddenly stumbles in execution. The bigger risk is that the AI buildout can come in waves. After all, the semiconductor industry has been cyclical for years -- and it's unlikely that this will ever change.
Competition is also evolving. Some customers, including deep-pocketed tech giants Alphabet and Amazon, are designing their own chips.
Export rules remain another wild card. Nvidia has shown it can grow rapidly while China demand fades in importance, but regulatory changes can still pressure near-term sales and margins.
NASDAQ: NVDA
Key Data Points
Sure, the stock's pullback makes Nvidia shares more interesting than they were a few months ago. Additionally, it's difficult to critique the business. Not only did sales accelerate in Q3 but management guided for a massive fourth quarter.
Even so, the stock's high valuation means investors likely won't be very forgiving if the AI boom starts to fizzle out. To be clear, it's not fizzling out. But since the market is forward-looking, all it will take is a few material signs of a cooling market for AI chips to send the stock sharply lower. While there's no guarantee this happens, it is a risk that demands a margin of safety when buying the stock -- and I do not believe the stock's margin of safety at the moment is sufficient.
