Nvidia (NVDA +1.90%) stock hit some tough headwinds in 2025 -- shares of the chip designer are down 15% year to date as of this writing. However, evidence is piling up that this selloff may not be justified.
The stock price pulled back for multiple reasons -- among them, fears of a potential drop in artificial intelligence (AI) hardware spending following the launch of DeepSeek's cost-effective AI model, the macroeconomic uncertainty created by President Donald Trump's tariffs, and concerns that Nvidia could face rising competition within the AI chip industry.
Some of these concerns are overblown.
Here are three reasons why Nvidia is a top AI stock to buy in the wake of its recent drop.
Source: Getty Images
1. AI spending across the sector remains solid
Nvidia stock took a big blow in January after Chinese AI start-up DeepSeek claimed that it had trained its R1 reasoning model for a fraction of what major tech companies spend on training their large language models (LLMs). This sparked concerns that companies and governments who have been lining up to buy Nvidia's graphics processing units (GPUs) to train and deploy AI models in data centers might cut orders.
So far, they haven't. When Nvidia released its fiscal 2025 fourth quarter (which ended Jan. 26) results in February, management issued healthy guidance that should have assuaged investors' concerns about GPU demand. Its guidance for revenue of $43 billion in fiscal 2026's Q1 amounted to a year-over-year increase of 65%.
That's impressive considering that Nvidia has already attained a big sales base: It ended fiscal 2025 with $130.5 billion in total revenue, more than double its top line in the previous year. Management credited its upbeat guidance to the robust demand for Nvidia's latest generation of Blackwell AI GPUs, which delivered stronger-than-expected revenue last quarter.
Looking ahead, it won't be surprising to see Nvidia delivering another set of strong results this month. Recent commentary from tech giants such as Meta Platforms, Microsoft, and Alphabet indicates that their spending on AI data centers continues to remain healthy.
Meta, for instance, increased its 2025 capital expenditure guidance by almost 9% to $68 billion at the midpoint of its new range. That higher spending will go toward bolstering the social media giant's AI infrastructure. Microsoft is on track for $80 billion in capital expenditures in its fiscal 2025, and it expects to raise its spending in the next fiscal year since it is facing AI capacity constraints.
Even Alphabet has reaffirmed its $75 billion capex guidance for 2025, which would be a 43% increase compared to last year. All this explains why Morgan Stanley forecasted a sharp increase in sales of Nvidia's Blackwell processors to $30 billion in Q1 -- nearly triple the revenue it generated in the fourth quarter of fiscal 2025.
NASDAQ: NVDA
Key Data Points
2. Nvidia is still the top player in AI chips
There have been concerns that competitors could dent Nvidia's terrific growth trajectory, but it looks like the chipmaker remains miles ahead of its rivals in the AI chip market. For instance, Nvidia sold $115 billion worth of data center chips in the previous fiscal year. That was well ahead of Advanced Micro Devices' estimated data center GPU sales of $5 billion. Even Broadcom, which is considered to be the next most important chip company after Nvidia, sold just $12.2 billion worth of AI chips in its most recent fiscal year.
Meanwhile, Intel isn't making much progress in data center chips. Chipzilla's revenue from its data center and AI segment was up just 8% in the first quarter of 2025 to $4.1 billion, which points toward a $16.4 billion annual revenue run rate. Moreover, Nvidia is likely to maintain its dominant share of the AI chip market in 2025 thanks to its solid control over the supply chain.
The semiconductor bellwether is expected to corner 77% of the AI semiconductor wafers that will be produced this year, up from 51% in 2024. The wafer consumption shares of Intel and AMD are expected to shrink, indicating that Nvidia will continue to control the lion's share of the AI chip market. That should pave the way for terrific long-term growth in Nvidia's data center revenue as the AI chip market is projected to grow at an annualized rate of 35% a year through 2033
3. Nvidia's valuation is too good to pass up right now
Nvidia stock's drop this year and the impressive growth that it has been clocking means that investors can buy it at an attractive valuation right now. Nvidia stock trades at 38 times trailing earnings, much lower than its price-to-earnings ratio of 62 at the end of January. Moreover, the forward earnings multiple of 25 points toward a big jump in its bottom line, and is also lower than the U.S. technology sector's earnings multiple of 42.
Analysts expect a 48% increase in Nvidia's earnings this year, which would be significantly higher than the 8% average earnings growth that companies in the S&P 500 index expect to clock. Nvidia could indeed deliver such strong growth this year thanks to the points discussed above, and there is a chance that it may even outpace analysts' expectations as its margins improve in the second half of the fiscal year, as the production of Blackwell processors ramps up further.
So, buying this AI stock looks like a no-brainer right now in light of its attractive valuation, dominant position in AI chips, and the tech sector's robust spending on AI infrastructure.
