When it comes to the stock market, it’s often a bumpy ride. Nvidia, known for its meteoric rise in early 2023, has recently hit a bit of a speed bump. Despite a remarkable 730% surge in the past year, the stock dipped 4% in the last three months.
Various factors have contributed to this stagnation, including concerns about the adoption of generative artificial intelligence (AI), rumors of delays in the launch of Nvidia’s next-gen Blackwell platform, worries about shrinking gross margins, and apprehensions about the stock being overvalued.
But, don’t hit the panic button just yet. A closer look indicates that the fears surrounding Nvidia may be exaggerated. I foresee a bright future for the company, with stock prices continuing to soar and set new records right into 2025.
Image source: Getty Images.
The Resilience of AI Adoption
In recent years, the tech scene has been abuzz with AI advancements, propelling the stocks of tech giants skyward. Despite concerns over a potential AI slowdown, leading companies like Alphabet, Microsoft, Amazon, and Meta Platforms have revealed plans to escalate capital expenditures for the rest of 2024 and the upcoming year.
Most of these investments will be channeled into setting up servers and data centers to support AI operations. Given that these behemoths are Nvidia’s primary clients, it’s a positive sign that Nvidia’s growth trajectory remains intact.
Stepping back and examining the big picture, McKinsey & Company’s projections foresee that Generative AI will inject trillions of dollars into the global economy over the upcoming years, signaling a sustained evolution in AI applications.
The Progress of Blackwell
Reports surfaced in August about potential delays in Nvidia’s Blackwell chips production, sparking concerns among investors. However, Nvidia’s CFO, Colette Kress, reassured stakeholders during the quarterly report that Blackwell chips were on track.
Customer samples for the Blackwell architecture were dispatched in the second quarter, with production ramp-up slated to commence in Q4 and continue into fiscal 2026. With expectations of billions in Blackwell revenue by the end of the year, it seems the reported delays were much ado about nothing.
Clarity on Growth Concerns
Despite generating record revenue and profits in the second quarter of fiscal 2025, Nvidia faced scrutiny over two main issues: a slight dip in gross margins and speculations about a growth slowdown.
While the gross margin contracted slightly from the previous quarter, Nvidia’s projections for the remainder of the year remain strong. The company anticipates gross margins to hover around the mid-70% range, still significantly higher than its 10-year average.
In terms of revenue, Nvidia’s forecast for the fiscal third quarter signals outstanding growth, albeit at a reduced pace compared to earlier periods. Even with the inevitable moderation in growth rates, Nvidia’s revenue expansion remains remarkable within the industry.
Dispelling the Pricey Perception
The prevalent narrative of Nvidia being overly expensive is not without merit, given its current 57x earnings valuation compared to the S&P 500’s P/E ratio of 30. However, a historical perspective unveils a different story.
Relative to its past decade’s average P/E ratio, Nvidia is actually trading at a slightly lower level. Over the last ten years, Nvidia’s stock has surged over 25,000%, underlining its historical performance and justification for a premium valuation.
Looking ahead, Wall Street’s projected earnings per share for the upcoming fiscal year paint a brighter picture, indicating Nvidia is trading at less than 29 times forward earnings, a bargain considering its continuous growth trajectory.
An Insightful Perspective on Nvidia’s Future
As Nvidia’s stock soared over the past year, it’s only natural for investors to pause and assess the situation. However, what may seem like significant factors dragging down the stock are, in reality, mere shadows on the wall.
Nvidia continues to attract heavy investment from its major clients, while its next-gen platform progresses steadily. The company’s gross margin remains close to a historic high, and despite initial appearances, its valuation is not as outlandish as it seems.
All signs point to a clear pathway for Nvidia’s journey ahead, and I anticipate that the stock will continue its upward trajectory well into 2025.
Exploring Investment Opportunities in Nvidia
Before diving into buying Nvidia stock, it’s crucial to consider some key aspects:
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