Nvidia‘s (NASDAQ: NVDA) journey from a distinct segment gaming hardware company to a $3.18 trillion tech behemoth offers an awesome example of the potential that comes with long-term investing. A $1,000 investment made a decade ago has grown to be price $270,790. But as this stock’s ongoing rally (largely driven by the synthetic intelligence (AI) trend) gets long within the tooth, investors will want to pay closer attention to its results for clues about what the approaching 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 possible price bubble?
Let’s dig deeper.
It would get harder to impress the market
During earnings season, retail investors often get confused when their stocks drop despite increasing revenue and profits. The worth fluctuations are often tied more to stock valuations tied to projected future performance, not current performance. So, if an organization doesn’t constantly exceed expectations, its shares can drop even after what would otherwise be considered good business results. This might turn into a significant challenge for Nvidia because it seeks to one-up already spectacular results from prior 12 months periods.
Within the second quarter of fiscal 2024 (which is generally related to the calendar 12 months 2023), Nvidia’s revenue grew 101% 12 months over 12 months to $13.51 billion. That figure pales compared to analysts’ expectation of $28.7 billion in revenue in Q2 of fiscal 2025. Meeting or exceeding these lofty market expectations can be the important thing for Nvidia to keep up its valuation of 40 times sales in comparison with the S&P 500 average of slightly below 3.
Can margins stay this high?
A part of the rationale 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) just 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 as a substitute of physical products.
Nvidia could also be making the most of chip scarcity and its competitive benefits, akin to its GPU-associated software platform CUDA (which programmers are more conversant in) to cost gouge consumers. And investors should keep an in depth eye on gross margins within the second quarter and beyond.
Up to now, 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 thought of raising its production prices to get a bigger slice of the pie. Capitalism tends to erode excess margins, and Nvidia’s windfall probably won’t last eternally.
Search for signs of economic slowdown
Earlier this month, higher-than-expected unemployment numbers set off alarm bells on Wall Street. And in line with analysts at J.P. Morgan, the probability of a U.S. recession stands at 35% before the tip of the 12 months. Investors should search for signs of those trends in Nvidia’s earnings.
Nvidia can be sensitive to changes in macroeconomic sentiment because its high-end AI GPUs are arguably “luxury” technology products that usually are not essential for the core operations of lots of its clients. Consumer-facing large language models (LLMs) are generally not profitable, making them more likely to be among the many first segments cut if the economy weakens.
While AI could turn into one of the transformational tech megatrends in years, it bears an uncanny resemblance to the dot.com bubble within the early 2000s. The industry could quickly unravel if corporations determine it isn’t any longer worthwhile to take a position a lot 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 often a foul idea. The chipmaker has constantly proven its naysayers improper with incredible results quarter after quarter. And the second quarter of fiscal 2025 may not be an exception.
That said, investors must also bear in mind that the risks of holding Nvidia are starting to rise — possibly greater than the potential rewards. The corporate will face increasingly difficult comps because it seeks to outdo already incredible earnings. And its unusually high margins may eventually come under pressure from suppliers and competition. The rising likelihood of a near-term recession might be the biggest possible headwind. And it could also be a great idea to take profits before the macroeconomic environment changes.
Do you have to invest $1,000 in Nvidia immediately?
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JPMorgan Chase is an promoting partner of The Ascent, a Motley Idiot company. Will Ebiefung has no position in any of the stocks mentioned. The Motley Idiot has positions in and recommends Advanced Micro Devices, JPMorgan Chase, Microsoft, and Nvidia. The Motley Idiot recommends the next options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Idiot has a disclosure policy.
Should You Buy Nvidia Stock Before Second-Quarter Earnings? was originally published by The Motley Idiot