Some market forecasters would argue that, as Nvidia (NASDAQ: NVDA) As stocks go, so goes the artificial intelligence (AI) bull market. Wall Street has rallied around Nvidia, thanks to its dominance of the AI ​​chip market. It’s the flagship company that represents the rise of large language models and other AI technology, arguably the biggest technological leap forward since the internet began developing in the late 1990s.
After soaring over the past two years, Nvidia’s stock price has turned a corner, with the stock down about 22% from its June 2024 peak. Buying the dip on winning stocks has been a successful investment strategy for years. And frankly, it’s hard to imagine an AI future without Nvidia playing a major role.
However, it is wise to consider these risks before buying the shares today.
Nvidia looks cheap, but maybe that’s not without reason
Nvidia’s AI-friendly GPU chips have become the go-to choice for tech companies building large data centers to run powerful AI models. About $26.3 billion of Nvidia’s total $30 billion in Q2 revenue came from the data center segment, so Nvidia has effectively become a pure play on AI chips. The good news is that data center revenue was up 154% year over year in Q2 and up 16% from the previous quarter, a sign that demand for chips remains strong.
Analysts now estimate that Nvidia will earn $2.84 per share this year and $4 per share next year. Using next year’s estimates, Nvidia is valued at a forward price-to-earnings (P/E) ratio of 26. If Nvidia grows profits 40% annually over the long term, as analysts believe, it’s probably a bargain right now.
There’s an argument to be made, however, that Nvidia’s revenues, impressive as they may be, are risky enough that investors want a huge margin of safety to buy the stock. A handful of companies are propping up Nvidia’s sales. Specifically, four companies make up 40% of Nvidia’s total revenues. To make matters worse, all four — Microsoft, Meta platforms, AlphabetAnd Amazon — have been working on developing their own AI chips.
Margins can become an issue
These companies won’t necessarily stop using Nvidia’s chips altogether (though anything is possible). But Nvidia has enjoyed remarkable pricing power since the AI ​​rush early last year. AI became a race where speed to market became the priority.
There are signs that the AI ​​market is slowly evolving. Investors have openly questioned whether big tech companies are seeing the returns needed to justify all this data center spending.
Market research has shown that traffic to ChatGPT, once the fastest-growing app in history, has declined in recent months. Amazon management noted in the company’s Q2 earnings call that its AI customers want more value.
Price wasn’t a big deal when AI was new, but it’s starting to become a talking point. That could mean pricing pressure for Nvidia in the future. The company may have to choose between sacrificing market share to competitors or accepting lower margins to maintain market share.
This year, Nvidia is expecting gross margins in the mid-70s, so that’s something to keep an eye on in 2025 and beyond. You can see that margins this high are much higher than anything pre-pandemic:
It’s tempting to ignore such a long-term concern, but remember that Nvidia only looks cheap because everyone expects great sales and profits years from now. Margins reverting to long-term averages would be disastrous for investors.
Should Investors Buy Nvidia Stock Today?
These concerns aren’t here to discourage you from buying Nvidia. They’re here to inform you of the risks. As impressive as Nvidia’s financials are today, they’ve been kept afloat by a few deep-pocketed customers who are cashing in on being an early AI winner. Nvidia could be the leading AI chip company in 20 years, but its sales and/or profit margins could also erode and send the stock tumbling.
The tricky thing is that both statements could be true.
Long-term investors looking to buy the stock during this dip should do so responsibly. Consider a dollar-cost averaging strategy to accumulate shares slowly. That way, volatility is more of an opportunity than a cause for stress. Nvidia could be in for a bumpy ride in the near future, even if it makes investors money in the long run.
Should You Invest $1,000 in Nvidia Now?
Before you buy Nvidia stock, here are some things to consider:
The Motley Fool Stock Advisor team of analysts has just identified what they think is the 10 best stocks for investors to buy now… and Nvidia wasn’t one of them. The 10 stocks that made the cut could deliver monster returns in the years to come.
Think about when Nvidia made this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $630,099!*
Stock Advisor offers investors an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks each month. The Stock Advisor has service more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns as of September 9, 2024
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, 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 chief market development officer and spokeswoman for 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 has positions in and recommends Alphabet, Amazon, Meta Platforms, 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.
Is Nvidia Stock a Bargain Right Now? was originally published by The Motley Fool
