Chipmaker Nvidia (NVDA -0.99%) has seen its stock recover nicely from a pullback in late July and early August. Shares have gone from trading at levels below $100 earlier this month to around $124, as of this writing. That's approximately a 25% gain in a very short period. With so much change so fast, investors who bought the dip or who have been holding from much lower levels earlier this year may be debating whether it might make sense to take their profits and move on.
The decision about whether the stock should be sold at this level is not an easy one. The company, which creates graphic processing units (GPUs) powering the deep learning and artificial intelligence (AI) craze, trades at 74 times earnings -- a high premium. But Nvidia's underlying business fundamentals are incredible; revenue in the company's most recent quarter soared 262% year over year, and earnings per share skyrocketed 629% over the same period.
Here's a closer look at both the bull and bear cases for the stock to help investors decide for themselves what they should do.
The bull case
Investors bullish on the stock quickly point out that the company's impressive top-line growth is likely to persist for some time. This, bulls say, is evidenced by the fact that demand for the company's flagship H200 and Blackwell chips remains ahead of supply. Nvidia chief financial officer Colette Kress even noted in the company's most recent earnings call that the company expects demand for these products to "exceed supply well into next year."
Further, Nvidia bulls might point to the company's revenue guidance for its fiscal second quarter of 2025 to show how growth is continuing. Management forecast fiscal second-quarter revenue of $28 billion, a figure translating to more than a doubling of revenue and likely even faster earnings-per-share growth. Momentum like this will likely help quickly bring down Nvidia's high price-to-earnings (P/E) ratio.
The bear case
Fundamental to the bear case for Nvidia stock is the fact that the market is forward looking -- particularly when dealing with stocks trading at high premium valuations. This means that Wall Street may severely punish Nvidia shares if it starts seeing evidence of potential future deterioration of revenue growth rates or earnings. A simple comment from management during an earnings call about demand and supply for Nvidia's key products getting closer to equilibrium, therefore, could spook investors and cause them to no longer believe the stock deserves a valuation multiple as high as it currently commands.
Further, what appears to be Nvidia's strength today -- its high profit margin -- is the same factor that makes it vulnerable. For instance, the company's gross margin in the first quarter of fiscal 2025 impressively expanded from 66.8% in the year-ago quarter to 78.9%. However, a higher-than-usual gross margin means normalization could occur in the future as demand catches up to supply and as competitors do a better job making competing products.
In an environment like this, Nvidia may have to lower the price of its products, and its margins could take a hit. This could lead to not only a slowdown in earnings but possibly even a decline.
Headwinds to Nvidia's margins and earnings growth (if they ever materialize) could be more than a year away. But a forward-looking market could start pricing in these risks any moment.
Overall, Nvidia seems like a great company, but a risky stock at this price. Selling shares and buying something more attractive may make sense.
