To say that Nvidia (NVDA +4.32%) has been a darling for the investment community would be putting it very mildly. This business crushed it for investors, as shares have climbed an unbelievable 2,447% in the past five years, propelled lately by a monster 171% gain just in 2024.
This top artificial intelligence (AI) stock trades close to its all-time high, as of this writing. After such an incredible run, should you still consider buying Nvidia right now?
Demand is off the charts
Nvidia sells graphics processing units (GPUs) that provide computing power for various uses. More than two decades ago, the main function was to support PC gaming. But what has put the business on the map in recent years has been its GPUs that enable training AI models in massive data centers, now representing the bulk of the chipmaker's sales.
The particular desire for companies across the board to develop, invest in, and offer their own customers various AI-related services results in a direct benefit for Nvidia because it commands a monopolistic position in the market for AI chips. The company can essentially be viewed as the top pick-and-shovel investment in the AI space.
Demand has been off the charts. The recently launched Blackwell architecture is seeing tremendous interest from customers. "Blackwell demand is staggering, and we are racing to scale supply to meet the incredible demand customers are placing on us," Chief Financial Officer Colette M. Kress said on the company's fiscal 2025 third-quarter earnings call.
Revenue in the latest fiscal quarter surged 94% year over year. And Wall Street analysts expect sales to jump 72% in the fourth quarter. It's also worth pointing out that the business is extremely profitable, posting a fantastic 62% operating margin in the fourth quarter.
NASDAQ: NVDA
Key Data Points
Nvidia's risk factors
If you're considering buying shares, the company's fundamental momentum is hard to ignore. But you must look at the valuation. The stock trades at a price-to-earnings ratio (P/E) of 56.9, which is a 77% premium to the tech-heavy Nasdaq 100 index. The business' remarkable growth and profitability might warrant a high valuation, but it's definitely still elevated. And investors should be mindful of downside factors.
Perhaps the most notable risk facing Nvidia comes from its own customer base, due to concentration with the top four representing 53% of accounts receivable as of Oct. 27. It's believed that this roster may include Meta Platforms, Microsoft, Amazon, and Alphabet.
All are developing their own AI chips in an effort to bring this costly endeavor in-house, a smart strategy given the billions of dollars they all are investing to boost their AI capabilities. The long-term result could be softer demand for Nvidia as these deep-pocketed tech giants move to vertically integrate their supply chains.
We could also witness the bursting of the AI bubble. Investors seem to always overestimate what new technologies can do in the short run, bidding up asset prices and prompting corporate executives to direct resources to avoid being behind the trend.
But these AI models are extremely expensive to operate, users still find errors when working with them, and there could be a limit to their performance as the available unused data in the world grows smaller. Nonetheless, AI is hyped as a solution to a lot of problems, which isn't a certainty.
Tread with caution
It's extremely difficult to argue with what Nvidia has been able to accomplish, quickly rising up the ranks to become one of the world's most valuable enterprises as it put itself at the forefront of the AI boom. This has undoubtedly made the company a winning choice among investors, who have made boatloads of money owning the stock.
However, I always struggle to recommend purchasing shares of a business when optimism, excitement, and greed are running high, as these things can be unsustainable. It's also best not to ignore the key risks of valuation, customers working to move upstream, and the chance of the AI bubble bursting.
Taking everything together, I don't believe Nvidia is a smart buy right now.
