Nvidia‘s (NVDA 4.55%) journey from a niche gaming hardware company to a $3.18 trillion tech behemoth offers a great example of the potential that comes with long-term investing. A $1,000 investment made a decade ago has grown to be worth $270,790. But as this stock’s ongoing rally (largely driven by the artificial intelligence (AI) trend) gets long in the tooth, investors may want to pay closer attention to its results for clues about what the coming years may bring.
With each passing quarter, more investors are asking: Is Nvidia stock still a buy, or is it time to take profits before a disappointing earnings report pops a potential price bubble?
Let’s dig deeper.
It will get harder to impress the market
During earnings season, retail investors often get confused when their stocks drop despite increasing revenue and profits. The price fluctuations are usually tied more to stock valuations tied to projected future performance, not current performance. So, if a company doesn’t continuously exceed expectations, its shares can drop even after what would otherwise be considered good business results. This could become a major challenge for Nvidia as it seeks to one-up already spectacular results from prior year periods.
In the second quarter of fiscal 2024 (which is mostly associated with the calendar year 2023), Nvidia’s revenue grew 101% year over year to $13.51 billion. That figure pales in comparison to analysts’ expectation of $28.7 billion in revenue in Q2 of fiscal 2025. Meeting or exceeding these lofty market expectations will be the key for Nvidia to maintain its valuation of 40 times sales compared to the S&P 500 average of just under 3.
Can margins stay this high?
Part of the reason why Nvidia can justify such a high top-line valuation is its gross margins, which compare its products’ sales prices to their direct production costs. Last quarter, this number stood at an eye-watering 78.4%, helped by industry-leading AI graphics processing units (GPUs) like the h100, which sell for around $25,000 per unit. For context, Microsoft has a lower gross margin of 70% despite primarily selling digital software-as-a-service instead of physical products.
Nvidia may be taking advantage of chip scarcity and its competitive advantages, such as its GPU-associated software platform CUDA (which programmers are more familiar with) to price gouge consumers. And investors should keep a close eye on gross margins in the second quarter and beyond.
Image source: Getty Images.
So far, competition from rivals like Advanced Micro Devices hasn’t led to notable margin pressure. But Nvidia’s top supplier Taiwan Semiconductor Manufacturing has floated the idea of raising its production prices to get a larger slice of the pie. Capitalism tends to erode excess margins, and Nvidia’s windfall probably won’t last forever.
Look for signs of economic slowdown
Earlier this month, higher-than-expected unemployment numbers set off alarm bells on Wall Street. And according to analysts at J.P. Morgan, the probability of a U.S. recession stands at 35% before the end of the year. Investors should look for signs of these trends in Nvidia’s earnings.
Nvidia will be sensitive to changes in macroeconomic sentiment because its high-end AI GPUs are arguably “luxury” technology products that are not essential for the core operations of many of its clients. Consumer-facing large language models (LLMs) are generally not profitable, making them likely to be among the first segments cut if the economy weakens.
While AI could become one of the most transformational tech megatrends in years, it bears an uncanny resemblance to the dot.com bubble in the early 2000s. The industry could quickly unravel if companies decide it is no longer worthwhile to invest so much in a largely unproven opportunity.
Is Nvidia stock a buy?
If the last two years of earnings are anything to go by, betting against Nvidia is typically a bad idea. The chipmaker has continuously proven its naysayers wrong with incredible results quarter after quarter. And the second quarter of fiscal 2025 might not be an exception.
That said, investors should also be aware that the risks of holding Nvidia are beginning to rise — possibly more than the potential rewards. The company will face increasingly challenging comps as it seeks to outdo already fantastic earnings. And its unusually high margins may eventually come under pressure from suppliers and competition. The rising likelihood of a near-term recession is probably the biggest possible headwind. And it may be a good idea to take profits before the macroeconomic environment changes.
JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, JPMorgan Chase, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
