Nvidia's (NVDA +4.39%) H100 chips became the go-to building block for artificial intelligence (AI) data centers powering models like OpenAI's ChatGPT. Technology's most prominent companies have bought hundreds of thousands of H100 chips, giving Nvidia the lion's share of the AI chip market.
The H100's success fueled rampant growth and propelled the stock to a multitrillion-dollar valuation. Now, Nvidia is about to launch its Blackwell platform, its next-generation architecture that it expects will take AI technology to the next level.
Should you buy Nvidia stock before Blackwell arrives in the coming weeks? Here is what you need to know.
Nvidia could be a bargain if it remains atop the AI mountain
AI completely changed Nvidia's trajectory, and it happened seemingly overnight. Revenue and the share price grew so fast that some investors might question whether this is sustainable or just a flash in the pan. Stated plainly, Nvidia must maintain strong chip demand and pricing power. If it does, the stock is arguably a bargain today.
Sales momentum still looks healthy. The company's data center segment grew sales 154% year over year in the second quarter of its fiscal 2025, a 16% increase over the first quarter. Management guided for $32.5 billion in third-quarter revenue, representing nearly 80% year-over-year growth and an 8% increase from the second quarter.
Growth is slowing, but it was bound to since the blistering rate last year creates increasingly challenging comparables to beat. But management said in its second-quarter earnings call that H100 demand is still growing. It also maintained that its gross margins will finish the fiscal year in the mid-70% range. Overwhelming AI demand has given Nivida pricing power that has boosted margins well beyond past levels:
NVDA gross profit margin; data by YCharts.
The margin guidance implies that Nvidia still enjoys pricing leverage. Declining margins would be a red flag since that would indicate potential problems like slowing demand or competitive pressure. That would also slow earnings growth, a problem for anyone who buys the stock today with the expectations of strong growth in the future.
Shares trade at a forward price-to-earnings ratio of 41 times fiscal 2025 earnings and 29 times the following year's estimates, roughly six quarters out. Analysts believe the company will increase earnings by an average of 36% annually for the next three to five years, giving it a price/earnings-to-growth ratio (PEG) of just over 1.1. It's a solid argument that Nvidia remains a table-pounding buy, assuming growth stays on track.
Blackwell's demand seems strong
Whether the company can meet these high expectations over the next several years will depend on its upcoming Blackwell chip architecture, the successor to the H100. So far, it seems that the new chip is poised to deliver. Management said during the second-quarter call that Blackwell will enter production in the fourth quarter, soon enough to generate revenue before the fiscal year ends.
What's important is that there is more demand than available supply. This, of course, bodes well for continued sales performance and supports the pricing leverage needed to maintain profit margins. The company gets an estimated 40% of its revenue from Meta Platforms, Microsoft, Alphabet, and Amazon. Thus far, these power spenders haven't indicated plans to withdraw from the AI arms race. Nvidia's management expects Blackwell demand to outpace supply into the next fiscal year.
The underlying trend supporting all this growth is that more-advanced AI requires more code and data to build and train. As these models grow, they need increasing computing power to run them. Nvidia estimates that next-generation models will require 10 to 20 times more computing capacity. If so, old hardware could quickly fall behind.
NASDAQ: NVDA
Key Data Points
Should you buy the stock?
It's fair to question the billions of dollars large tech companies spend on AI, but so much is at stake. For cloud providers like Amazon and Microsoft, integrating AI is part of protecting and growing their cloud businesses. Alphabet's CEO has stated that the risk of underinvesting in AI and falling behind competitors outweighs the risk of overspending.
Plus, the competition has struggled to break Nvidia's stranglehold on the AI chip market. Intel set out to reestablish itself in the chip industry but has struggled to the point that acquisition rumors are swirling. Right now, the path forward looks clear. Nvidia seems poised to deliver on admittedly high expectations over the next 18 months, which justifies buying the stock as Blackwell is prepared for launch.
However, a word of caution: It's unclear whether the company can indefinitely sell this many chips at such high margins. It depends on these power spenders, and big tech companies could eventually tire of shelling out the cash to buy all these chips and instead seek alternatives. You should approach Nvidia as a higher-risk stock even if the fundamentals say it's a strong buy today.
