After a remarkable ascent since early 2023, Nvidia (NASDAQ: NVDA) has encountered a temporary plateau. With a staggering 730% surge in the past year, the stock has recently stagnated, showing a 4% dip over the last three months.
Several concerns have impacted the stock, including worries about a slowdown in generative artificial intelligence (AI) adoption, rumors of a postponed release of Nvidia’s Blackwell platform, fears about a decreasing gross margin, and apprehensions around the stock’s high valuation.
Yet, a closer examination of the facts reveals that while these concerns are valid, they are largely unwarranted. There exists significant potential for Nvidia to continue its upward trajectory, with a forecast suggesting the stock will persist in reaching new record highs through 2025 and beyond. Here’s why:
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The Path of AI Adoption
The surge in technology stocks, fueled by the rapid adoption of AI since early 2023, has led to questions about the sustainability of this growth. However, recent announcements from tech giants like Alphabet, Microsoft, Amazon, and Meta Platforms reveal plans for substantial capital expenditures dedicated to supporting AI infrastructure. Given that these companies are among Nvidia’s primary clients, this signals a promising growth trajectory for the company.
Considering the broader perspective, estimates from McKinsey & Company suggest that generative AI could contribute trillions to the global economy in the years ahead, indicating a continued surge in AI adoption.
Blackwell Progress on Track
In early August, concerns arose regarding potential delays in Nvidia’s Blackwell chips production. However, reassurance came during the late August quarterly results announcement, affirming that Blackwell architecture samples had been shipped during the second quarter. Production was set to ramp up in the fourth quarter, countering fears of significant delays.
Long-Term Growth Outlook
While Nvidia’s fiscal 2025 second quarter results displayed impressive performance with record revenue and data center revenue, concerns over a declining gross margin captured investor attention. The company attributed this to product mix and inventory adjustments related to the Blackwell rollout. Despite the dip, Nvidia’s projected mid-70% gross margins for the year remain robust compared to historical averages.
The outlook for Nvidia’s third quarter anticipates record revenue growth at 79%. While this marks a deceleration from previous quarters, the company’s consistent exceptional performance underscores its enduring strength.
Rethinking the Valuation
Debates surrounding Nvidia’s seemingly high valuation are prevalent, with the stock currently trading at 57 times earnings, surpassing the S&P 500’s price-to-earnings ratio of 30. However, historic analysis reveals that Nvidia’s P/E ratio is below its 10-year average. Furthermore, the stock’s exponential growth over the past decade emphasizes its premium status despite short-term fluctuations.
Looking forward, with a forward P/E ratio of below 29 based on projected earnings for the next fiscal year, Nvidia remains attractively priced, especially given its ongoing growth trajectory.