Shares of graphics and artificial intelligence (AI) chipmaker Nvidia (NVDA -0.45%) have pulled back meaningfully recently. After soaring from a share price of under $500 at the beginning of the year to a 52-week high of $974, shares have retreated nearly 11% as of this writing. Given both the stock and (more importantly) the business's underlying momentum, some investors may be debating about whether this is a good time to buy shares.
Though there's no denying Nvidia's momentous sales and earnings growth as of late, investors may want to think twice before they buy this dip. Sure, there's always a chance shares could rocket higher from here and never return to this level, but the growth stock's premium valuation and its enormous gain of more than 200% over the past year also make a good case for increased risk for shareholders going forward. In this case, it may make sense for investors to take the time to appreciate the stock's heightened risk.
The bull case
Though Nvidia's stock has soared, bullish shareholders would be quick to point out that its revenue and earnings have soared, too. Nvidia's fiscal fourth-quarter revenue rose 265% year over year, and its total fiscal 2024 revenue increased 125%. Earnings per share for these two periods rose 765% and 586%, respectively. This momentum has been primarily driven by Nvidia's data center business, which saw fourth-quarter and full-year revenue rise 409% and 217%, respectively.
So, the crux of the bull case is simple: Growth like this easily justifies Nvidia stock's current valuation of about 71 times earnings. After all, the company's first-mover advantage and innovation leadership in the AI chip space is arguably irrefutable at this point. So, growth should remain impressive for some time. To this end, the consensus analyst forecast calls for Nvidia's earnings per share to grow at an average rate of 38% per year over the next five years. Earnings growth like this would almost certainly justify the stock's current valuation.
The bear case
The problem is that Nvidia's earnings growth trajectory over the long haul is extremely unpredictable. For instance, it's unclear how intense competition in the AI chip space will prove to be over the long term. A more competitive environment could lead Nvidia's margin to take a hit as supply and demand become more balanced (due to weakening pricing power), leading to earnings cooling off much faster than sales.
Another key risk is Nvidia's customer concentration. The company said in its fiscal 2024 10-K, filed with the Securities and Exchange Commission, that one of its customers accounted for about 19% of the company's total fiscal 2024 revenue when including this customer's purchases both directly with Nvidia and through its distributors. This compares to zero customers accounting for more than 10% of total revenue in both fiscal 2022 and 2023. The company's customer concentration in fiscal 2024 shows how significantly Nvidia's sales trends could be impacted if this major customer develops its own chips in-house or opts to buy alternative chips if they become more comparable to Nvidia's in the future.
Further, investors should remember that the market is forward-looking, not backward-looking. This means that the stock could begin selling off ahead of any potential lull in sales growth or demand deterioration rather than after it occurs. So, if there is even just a hint of demand weakness for Nvidia's products, shares could take a hit.
Investors, therefore, may want to consider waiting for a potentially more attractive price to buy Nvidia shares -- one leaving more room for unexpected problems or intensifying competition. Sure, the company's market-leading position and overall strength are breathtaking. But given how unpredictable Nvidia's future earnings are, it may make sense to exercise some patience in hopes of a potentially better purchase price in the future.
