Nvidia(NASDAQ: NVDA) has been the top stock in artificial intelligence (AI) for the past two years. The company’s dominance of the market for the chips that power the data centers used for AI has allowed the company to experience unprecedented growth.
The stock has risen more than 850% since the start of last year and continues to rise as its third-quarter earnings report approaches.
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Investors thinking about putting new capital into the stock are in a precarious position. I don’t blame anyone for feeling like they’re late to play, although buying along the way has only proven to be sensible so far. So, is Nvidia stock a buy heading into earnings? Here’s what you need to know.
The broader stock market has historically averaged annual returns of about 10%, so Nvidia’s outrageous move is rare and almost so dramatic that it feels like a bubble waiting to burst. But AI has created unique circumstances around the business.
Technology companies have fully embraced AI, creating perhaps the most significant growth opportunities since the early days of the Internet in the late 1990s. Remarkably, a key part of the AI capability (the chips that power it) is consolidated in Nvidia, which owns the lion’s share of the market, estimated at between 70% and 95%.
You can see below that sales and profits have risen in the same way as the share price:
So why does Nvidia keep climbing? Simply put, the stock is still fairly priced for its value expected grow. Consensus earnings estimates continue to rise:
NVDA revenue estimates for the current fiscal year
Analysts expect Nvidia to earn $2.82 per share this year, valuing the stock at 50 times earnings estimates. They also believe profits will grow at an average annual rate of 35.6% over the next three to five years. Even today, the valuation is reasonable for the expected growth, with a price-to-earnings-growth ratio (PEG) of 1.4.
Add to that the compelling AI story and Nvidia continues to look attractive, especially compared to solid, mature companies with similar earnings numbers but much less growth (I’m looking at you, Costco Wholesale).
This all works as long as Nvidia continues to meet these high expectations. But the higher it goes, the more the market expects. The company beat Wall Street’s consensus revenue estimate by just 4.5% last quarter, the smallest margin since the AI boom took off.
The company will report third-quarter results for fiscal 2025 in a few weeks. The danger is that Nvidia will not meet the high expectations of the market. If this does not work, it appears to be due more to supply constraints than to tepid demand for chips.
The company is about to transition from its Hopper architecture (the wildly popular H100 chips it has been riding with so far) to its next-generation technology, called Blackwell. CEO Jensen Huang discussed Blackwell during the company’s earlier earnings call, charting a production ramp-up that will begin in the fourth quarter and extend through Nvidia’s fiscal year 2026.
Huang emphasized that demand for Hopper is still strong enough to increase deliveries in the third and fourth quarters. Meanwhile, Nvidia has reportedly sold out of its Blackwell offering for the next twelve months. The biggest news from the upcoming earnings report will undoubtedly be the updated guidance and commentary on how smoothly the company can meet all these demands.
Nvidia does face a customer concentration risk because a small handful of large technology companies contribute a significant percentage of revenue. Still, technology leaders love it Microsoft have continued to indicate that they will continue to buy chips in what has essentially become an AI arms race.
That said, the stock can be very volatile. Any doubts about Nvidia’s growth trajectory could crush the stock, especially given the number of investors who could be sitting on the gains of recent years. It’s tough because it remains reasonably priced at a fundamental level, and it’s hard to dislike the company over the long term (five years and more) for its leadership in AI.
So, what’s the solution? Investors should take a slow and steady approach and use a dollar-cost averaging strategy to purchase small quantities on a schedule. That way, you’ll have shares if the price continues to rise and still have cash to take advantage of better buying opportunities as they arise.
Nvidia is riskier at these higher levels, but a long-term horizon and plan can help manage this.
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Costco Wholesale, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
Is Nvidia a buy? was originally published by The Motley Fool
