Nvidia (NASDAQ: NVDA) has been a darling of the investment community, with its shares climbing an astonishing 2,447% in the past five years. However, after such an incredible run, it’s essential to ask whether it’s still a good time to buy Nvidia stock.
Demand is Off the Charts
Nvidia sells graphics processing units (GPUs) that provide computing power for various uses, including PC gaming and artificial intelligence (AI). The company has been at the forefront of the AI revolution, with its GPUs enabling training AI models in massive data centers. This has led to a monopolistic position in the market for AI chips.
The recent launch of the Blackwell architecture has seen tremendous interest from customers, with demand "staggering" and the company racing to scale supply to meet the incredible demand. Revenue in the latest fiscal quarter surged 94% year over year, and Wall Street analysts expect sales to jump 72% in the fourth quarter.
Revenue Growth and Profitability
Nvidia’s business is extremely profitable, posting a fantastic 62% operating margin in the fourth quarter. The company’s revenue growth and profitability are hard to ignore, but it’s essential to look at the valuation.
Valuation: A Price-to-Earnings Ratio of 56.9
The stock trades at a price-to-earnings ratio (P/E) of 56.9, which is a 77% premium to the tech-heavy Nasdaq 100 index. While the company’s remarkable growth and profitability might warrant a high valuation, it’s definitely still elevated.
Risk Factors: Concentration and Vertical Integration
One of the most notable risks facing Nvidia comes from its own customer base, with the top four representing 53% of accounts receivable as of Oct. 27. This roster may include Meta Platforms, Microsoft, Amazon, and Alphabet, all of which are developing their own AI chips.
This could lead to softer demand for Nvidia as these deep-pocketed tech giants move to vertically integrate their supply chains. The long-term result could be a decline in the company’s sales and revenue growth.
The Bursting of the AI Bubble
Another risk facing Nvidia is the bursting of the AI bubble. Investors often overestimate what new technologies can do in the short run, bidding up asset prices and prompting corporate executives to direct resources to avoid being behind the trend.
However, these AI models are extremely expensive to operate, users still find errors when working with them, and there could be a limit to their performance as the available unused data in the world grows smaller. Nonetheless, AI is hyped as a solution to a lot of problems, which isn’t a certainty.
Tread with Caution
It’s extremely difficult to argue with what Nvidia has been able to accomplish, quickly rising up the ranks to become one of the world’s most valuable enterprises. However, I always struggle to recommend purchasing shares of a business when optimism, excitement, and greed are running high, as these things can be unsustainable.
Should You Invest in Nvidia Right Now?
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Conclusion
While Nvidia’s fundamentals are hard to ignore, it’s essential to be cautious about investing in the company given its high valuation and concentration of customers. It’s also worth considering the risks associated with the AI bubble bursting.
Ultimately, whether or not you should invest in Nvidia stock is a personal decision that depends on your individual financial goals and risk tolerance. However, I would recommend exercising caution and doing further research before making a decision.
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