With its share price up by a remarkable 24,000% over the last 10 years, Nvidia (NVDA 0.46%) has been a life-changing investment for shareholders who have held on for the long haul. But past performance isn't a guarantee of future results, and investors who buy its shares now are buying at the top of a mountain. What might the next 12 months have in store for this soaring chipmaker?
First quarter earnings were a blowout
Although Nvidia's parabolic stock price chart might make it look like it is in a speculative bubble, it isn't. The company's fundamentals have justified the rally, and its fiscal 2025 first-quarter results showed that its exceptional growth continues.
NASDAQ: NVDA
Key Data Points
In the period, which ended April 28, revenue grew 262% year over year to $26 billion, driven by relentless demand for Nvidia's high-end graphics processing units (GPUs) -- the variety used to run and train artificial intelligence (AI) models. These chips are expensive, and demand is exceeding supply, giving Nvidia incredible pricing power. The company's gross margin rose to 78.4% -- up 2.4 percentage points from the previous quarter and 13.8 percentage points year over year.
Nvidia is essentially selling physical hardware at software-level margins. Its rising gross margin suggests that the arrival of competing GPUs from peers like Advanced Micro Devices is not putting much pressure on its market share.
Over the next 12 months, AI chips based on Nvidia's new Blackwell infrastructure (designed to train AI algorithms faster and with greater energy efficiency) will extend the company's technological lead and allow it to maintain (or even grow) its already incredible pricing power.
Expect more profits and value returned to shareholders
Unsurprisingly, Nvidia's impressive top-line growth has led to equally impressive bottom-line performance. In its fiscal Q1, net income rose by 628% year over year to $14.9 billion. And the company is getting more serious about returning some of this value to shareholders -- it increased its quarterly dividend by 150% from $0.04 per share to $0.10 per share.
True, that gives it a trivial yield of just 0.02%. But Nvidia is also returning value through share repurchases. The company authorized a $25 billion stock buyback in late 2023, which (albeit minimally) will lower the number of shares outstanding and increase their fundamental value relative to future earnings and cash flow.
Over the coming year, investors should expect Nvidia's management to try and return more capital to shareholders, although future buyback authorizations will be controversial, considering the stock price is near record highs.
Is Nvidia the next Cisco?
While Nvidia stock itself isn't in a bubble, the underlying demand powering its growth (the generative AI industry) might be. Famous technology sector investor Cathie Wood compares the company to Cisco -- an internet hardware provider that boomed during the dotcom bubble before crashing when the tech sector deflated in the early 2000s.
Image source: Getty Images.
Although the internet eventually became one of the biggest technological megatrends of our lifetimes, it didn't take off as quickly as investors initially expected. And Cisco never regained the high valuation it enjoyed during the height of the bubble. Nvidia could face a similar risk if the software side of the AI industry doesn't live up to expectations.
According to The Washington Post, AI chatbots are still losing money on every search query because of their high training and operational costs. While demand for AI hardware is high now, it is unclear how long the market can stay elevated if the consumer-facing software side of the industry doesn't step up dramatically in the next 12 months.
The stock still looks good, but don't get greedy
Although it may be hard to believe, Nvidia's stock is still relatively affordable. Trading at a forward price-to-earnings ratio of 42, it is just moderately higher than the tech-heavy NASDAQ-100's average of 32. And this is a small price to pay for a company growing at a triple-digit percentage rate.
That being said, investors shouldn't get carried away. Over the next year, Nvidia's comps will get much more difficult, and its valuation will become harder to justify based on growth. The consumer-facing AI software industry will also need to start showing more results to justify the huge amount of capital being poured into Nvidia's hardware.
Although Nvidia stock still looks capable of outperforming the S&P 500, investors should make sure to diversify their portfolios.
