Nvidia (NVDA 0.20%), the godfather of artificial intelligence (AI) chips, just posted extraordinary quarterly results. Revenue was about $44.1 billion in its first quarter of fiscal 2026, a period that ends on April 27. Spotlighting the company's breakneck pace, this top-line figure was up 12% from the prior quarter and 69% year over year. Nvidia's data center segment, which is home to its AI products, did roughly $39.1 billion in revenue, up 10% sequentially and 73% year over year.
Still, I'm not buying the growth stock, even after a recent pullback in the share price over the last week. My decision to stay on the sidelines during this dip has nothing to do with business performance. It's because I believe today's results are going to make for extremely tough comparisons in future periods, and this will be challenging in the context of the stock's premium valuation. When expectations get stretched, even a modest slowdown can sting.
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Valuation leaves little room for error
Run the math on today's output. Annualizing the quarter's $44.1 billion in revenue implies about a $176 billion run rate. Free cash flow was about $26.1 billion in the quarter, which annualizes to just over $100 billion. Those are staggering figures. They also set a very high bar, especially for a company in a cyclical industry. In addition, for the stock to work from here, investors are effectively assuming that low- to mid-70% gross margins can be sustained, that demand stays broad across customers, and that the product mix remains rich as volumes scale.
Furthermore, capital returns are hardly material for investors. Nvidia repurchased about $14.1 billion of stock in the quarter and paid roughly $244 million in dividends. These figures are small relative to the company's market capitalization of more than $4.2 trillion as of this writing, and they hardly bolster the bull case for the stock.
When the company's top-line growth finally does start to slow and when margins begin normalizing, the stock will have two things working against it: a frothy valuation and comparisons that resemble peak-cycle economics. With a price-to-earnings ratio of 57 as of this writing, the set of assumptions behind today's price leaves very little wiggle room. Investors are effectively paying up for a future that looks a lot like the present: continued double-digit capital expenditure growth from customers, resilient pricing and product mix, a somewhat fair global trade environment, and competitors that are far behind the curve. Of course, it's possible that the future really is this rosy. But given the stock's valuation and the high bar the company is creating for itself, this is also the kind of setup where even small deviations matter. If growth slows from today's pace, or if margins move down from the low 70s, the market may no longer want to pay such a premium multiple for the stock, and shares could fall significantly.
Business risks
Though my main concerns are about valuation and tough comparisons, there are some legitimate business-specific risks to keep in mind, too.
First, there is customer concentration. One direct customer, for instance, represented about 16% of total revenue in fiscal Q1. Another accounted for 14%. Therefore, if these hyperscalers pause to digest capacity or simply slow their investments, it could materially affect Nvidia's growth trajectory and ultimately investor sentiment.
Another key concern is the threat of competition. While the company clearly dominates the AI chip space today, history is littered with examples of competition making inroads on leaders in different chip types over time. To conclude that it's different this time dangerously ignores past precedent. Over time, competition will probably make reasonable alternatives to Nvidia's chips -- and given the high margins Nvidia sells its most in-demand chips at, there's a lot of room for competition to undercut on pricing. Nvidia customers, therefore, might eventually be willing to embrace some alternative products from competitors, even if they are inferior, as long as they can get them at significantly lower prices.
With all of this said, shares would need to fall a lot further for me to be interested. My cautious approach could mean I miss out if I'm underestimating the durability of this growth cycle. But that's fine with me. I believe there are more attractive investments with better risk-to-reward profiles to consider buying than this Wall Street darling.
