Investor concerns regarding the momentum of artificial intelligence (AI) and a lofty valuation have punished the chipmaker. The future still looks bright.
Nvidia (NVDA 3.37%) has been on an epic roller-coaster ride in recent months. After taking a beating over the summer and losing more than a quarter of its value, the stock has mounted an impressive recovery and now sits roughly 10% off its all-time high (as of this writing).
Comments made by CEO Jensen Huang helped fuel its rise today, as the stock gained 3.1% as of 2 p.m. ET.
Despite the volatility, investors should keep their eyes on the prize.
Taking a step back
Nvidia has become something of a battleground stock in recent months and both sides have valid points. Management’s most recent forecast calls for sales growth of 80% for the current quarter. While that’s a deceleration of the triple-digit growth that captured headlines over the past year, it’s still impressive nonetheless.
Bears also point to the company’s gross margin of 75.1% in its fiscal 2025 second quarter (ended July 28), noting a decline from 78.4% in Q1. Given that it was a record performance, it’s best viewed in that context.
Management noted gross margin was down sequentially due to product mix and inventory provisions for its next-generation Blackwell AI processors, which are scheduled to begin shipping in Q4. Historically, new products have carried a higher margin profile, which could send gross profits higher. Furthermore, in an interview yesterday, CEO Jensen Huang noted that demand for the Blackwell processors was “insane.”
Finally, bears point to Nvidia’s lofty valuation, and at 58 times earnings, it’s easy to see their point. However, analysts’ consensus estimates are calling for Nvidia to generate earnings per share of $4.02 in its fiscal 2026 (which begins in January). That works out to less than 30 times next year’s expected earnings, which is comparable to a price-to-earnings (P/E) ratio of 30 for the S&P 500.
We’re still in the early innings of generative AI adoption. Some experts estimate the market will be worth $1.3 trillion by 2032, according to Bloomberg Intelligence. As a company at the forefront of the AI revolution, Nvidia still has plenty of upside ahead. That’s why the stock is still a buy.