Nvidia (NVDA 1.53%) has been the quintessential artificial intelligence (AI) stock for the past two years. The company's dominance in the market for the chips that power the data centers used for AI has launched it to unprecedented growth.
The stock has appreciated more than 850% since the beginning of last year and continues marching higher, with its third-quarter earnings report right around the corner.
Investors who are pondering putting fresh capital into the stock are in a precarious position. I don't blame anyone for feeling like they're late to the game, though buying along the way has only proved wise to this point. So, is Nvidia stock a buy heading into earnings? Here is what you need to know.
Why Nvidia stock continues to go higher
The broader stock market historically averages an annual return of about 10%, so Nvidia's outsize move is rare and almost so dramatic that it feels like a bubble just waiting to burst. But AI has created unique circumstances around the business.
Technology companies have fully embraced AI, creating arguably the most significant growth opportunity since the internet's early days in the late 1990s. Remarkably, a vital component of the AI opportunity (the chips that power it) has consolidated in Nvidia, which owns the lion's share of the market estimated at between 70% and 95%.
You can see below that its revenue and earnings have increased similarly to the stock price:
NVDA data by YCharts; TTM = trailing 12 months.
So, why does Nvidia keep climbing? Simply put, the stock is still reasonably priced for its anticipated growth. Consensus estimates for revenue continue to climb:
NVDA revenue estimates for current fiscal year; data by YCharts.
Analysts anticipate Nvidia earning $2.82 per share this year, pricing the stock at 50 times earnings estimates. They also believe earnings will grow by an average of 35.6% annually over the next three to five years. Even today, the valuation is reasonable for its expected growth, with a price/earnings-to-growth ratio (PEG) of 1.4.
Add in the compelling AI story, and Nvidia continues to look attractive, especially compared to stodgy, mature companies with similar earnings multiples but far less growth (I'm looking at you, Costco Wholesale).
Wall Street has set the bar high for Nvidia
This all works as long as Nvidia keeps meeting these high expectations. But the higher it goes, the more the market expects. The company beat Wall Street's consensus revenue estimate by only 4.5% last quarter, its smallest margin since the AI boom took off.
The company will report third-quarter earnings for its fiscal year 2025 in a few weeks. The danger is that Nvidia doesn't meet the market's lofty expectations. If it does come up short, it seems it would be more due to supply constraints than tepid chip demand.
The company is about to transition from its Hopper architecture (the wildly popular H100 chips that it has ridden to this point) to its next-generation technology, called Blackwell. CEO Jensen Huang discussed Blackwell on the company's prior earnings call, mapping out a production ramp-up that will begin in the fourth quarter and extend into Nvidia's fiscal year 2026.
Huang emphasized that Hopper demand is still strong enough that the shipments will increase in the third and fourth quarters. Meanwhile, Nvidia has reportedly sold out its Blackwell supply for the next 12 months. Arguably, the most important news from the upcoming earnings report will be updated guidance and commentary on how smoothly the company can fulfill all this demand.
Is Nvidia a buy? It could be if you're smart, and here is what to do
NASDAQ: NVDA
Key Data Points
Nvidia does have customer concentration risk in that a small handful of big technology companies contribute a significant percentage of its sales. Still, tech leaders like Microsoft have continued to indicate they will keep buying chips in what has essentially become an AI arms race.
That said, the stock could be highly volatile. Any doubts about Nvidia's growth trajectory could crush the stock, especially with how many investors could be sitting on profits from the past few years. It's tricky because it remains reasonably priced on a fundamental level, and it's hard not to like the company for the long term (five years and longer) due to its AI leadership.
So, what's the solution? Investors should take a slow and steady approach, using a dollar-cost averaging strategy to buy small amounts on a schedule. That way, you'll have stock if the price continues to climb and still have cash to take advantage of better buying opportunities as they come up.
Nvidia is riskier at these higher levels, but a long-term horizon and a plan can help manage it.
