After a blistering run since early 2023, Nvidia (NASDAQ: NVDA) has hit a wall. The stock is up 730% since the beginning of last year (at the time of writing), but over the past three months Nvidia has tread water, down about 4%.
A number of factors have weighed on the stock. Fears of a possible slowdown in generative artificial intelligence (AI) adoption, rumors of a delayed release of Nvidia’s next-generation Blackwell platform, concerns about a decline in the company’s gross margin and an expensive valuation have some investors fearing that the stock may have gotten ahead of itself.
However, a quick look at the available evidence suggests that while these concerns are understandable, they are also largely unfounded. I believe there is still plenty of room for Nvidia, and I predict its shares will continue to reach new all-time highs in 2025. This is why.
A speed bump in AI adoption?
Accelerating AI adoption has fueled the rise in tech stocks since early 2023, but investors are starting to wonder whether this breakneck pace could continue. There are indications that this is possible.
To close the second calendar quarter, Alphabet, Microsoft, AmazonAnd Metaplatforms all announced plans to increase capital expenditure (capex) for the remainder of 2024, while also laying out plans for significant increases next year. The vast majority of that spending will go toward equipping the servers and data centers needed to support AI. Considering these tech titans are Nvidia’s biggest customers, this suggests the company’s growth has legs.
Taking a step back and looking at the big picture can also provide context. Generative AI is expected to add between $2.6 trillion and $4.4 trillion to the global economy in the coming years, according to estimates from management consultancy McKinsey & Company. This suggests that AI adoption will continue for the foreseeable future.
Blackwell is on track
In early August, reports emerged that Nvidia’s next-generation Blackwell chips would be delayed by as much as three months due to production issues. The stock skidded on these reports as investors feared the worst.
When Nvidia announced its quarterly results at the end of August, CFO Colette Kress shut things down:
In the second quarter, we shipped customer samples of our Blackwell architecture. We’ve made a change to the Blackwell GPU mask to improve production efficiency. Blackwell production is expected to begin in the fourth quarter and continue through fiscal year 2026. In the fourth quarter, we expect to deliver several billion dollars of Blackwell revenue.
This suggests that the reported delays were much ado about nothing.
The fear of slowing growth is short-sighted
When Nvidia reported its second quarter fiscal 2025 results (ending July 28), there was a lot to like. The company generated record quarterly revenue, record quarterly data center revenue and robust profits. However, there were two things that investors seemed to focus on in Nvidia’s otherwise stellar results.
The first was the company’s gross margin, which fell from a file 78.4% in Q1 to 75.1% in Q2. During the earnings conference call, CFO Colette Kress noted that a combination of product mix and inventory provisions related to Blackwell’s rollout were the culprits.
That said, the company predicts gross margins will be around 70% for the remainder of the year. Although that is lower than the record results of the first quarter, that is still the case well ahead of Nvidia’s ten-year average gross margin of 62%.
The other issue that seemed to spook some investors was Nvidia’s forecast for its fiscal third quarter, which ends at the end of October. The company is targeting record sales of $32.5 billion, which would represent a growth of 79%. That would mark a slowdown from the triple-digit growth Nvidia achieved in each of the previous five quarters, but it’s still a notable achievement nonetheless.
Smart investors knew that the company’s growth rate would eventually slow, especially as Nvidia faces tough competition from last year. That said, the company’s revenue growth is still exceptional and should be viewed in that context.
Not as pricey as you might think
One of the biggest issues weighing on Nvidia is the idea that its stock is exorbitantly expensive. That view is certainly understandable, considering the stock currently sells for 57 times earnings, compared to a price-to-earnings ratio of 30 for the stock. S&P500. However, investors willing to take a step back will see that Nvidia isn’t as expensive as it seems at first glance.
A quick look at the stock chart shows that Nvidia is actually trading light lower than the average price-earnings ratio of the past ten years. It’s also worth noting that Nvidia stock is up more than 25,000% over the past decade, proof that the stock deserves — and continues to earn — a premium.
However, a look ahead suggests that the stock is even cheaper. Wall Street forecasts earnings per share of $4.02 for the next fiscal year, which starts at the end of January. That means Nvidia is currently trading for less than 29 times forward earnings (at the time of writing), which is a bargain, especially given the company’s continued growth prospects.
An objective view
Given the rise in Nvidia stock since early last year, it’s understandable that investors are taking a step back to survey the landscape. Still, it’s clear that the factors that have weighed on the stock are much ado about nothing.
Nvidia’s biggest customers continue to spend heavily on its products, its next-generation platform is on track, gross margin remains near record highs, and its valuation isn’t nearly as pricey as it might seem at first glance.
All of this suggests that Nvidia has a clear runway, and I predict the stock will continue to reach new highs well into 2025.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Danny Vena has positions in Alphabet, Amazon, Meta Platforms, Microsoft and Nvidia. The Motley Fool holds positions in and recommends Alphabet, Amazon, Meta Platforms, 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.
Prediction: Nvidia stock will rise in 2025. This is why. was originally published by The Motley Fool
