Nvidia’s stock has experienced a slight decline over the past three months, after a period of extraordinary growth, The Motley Fool reports.
Despite this recent stagnation, several underlying factors suggest that the stock could still have significant upward potential as it heads into 2025.
Nvidia’s stock surged by 730% since early 2023, but in the last three months, it has decreased by about 4%. Several issues have contributed to this cooling off, including concerns about the future of generative artificial intelligence (AI) adoption, rumors about production delays for Nvidia’s upcoming Blackwell platform, and a decline in the company’s gross margin. These concerns, coupled with a perception that the stock is overpriced, have caused some investors to question whether Nvidia can sustain its growth.
However, a closer look at the company’s performance and market conditions reveals that these fears may be overblown.
One of the key drivers behind Nvidia’s recent success has been the rapid adoption of generative AI, a trend that has fueled the rise of technology stocks since 2023. While there are concerns that this momentum could slow, major tech companies like Alphabet, Microsoft, Amazon, and Meta have announced plans to significantly increase their capital expenditures in AI-related infrastructure for the rest of 2024 and into 2025. As Nvidia is a key supplier for these tech giants, this suggests continued demand for its products.
Further bolstering optimism is the fact that generative AI is projected to add between $2.6 trillion and $4.4 trillion to the global economy in the coming years, according to McKinsey & Company. This paints a promising picture for Nvidia’s future growth prospects.
In August 2023, reports surfaced that Nvidia’s next-generation Blackwell chips might be delayed, which briefly rattled investors. However, Nvidia’s Chief Financial Officer Colette Kress reassured investors that the company had already shipped samples of the Blackwell architecture and that production would ramp up in the fourth quarter, with significant revenue expected into fiscal 2026. This alleviates concerns that the product rollout might be significantly delayed.
Despite a slight decline in Nvidia’s gross margin from 78.4% in the first quarter of fiscal 2025 to 75.1% in the second quarter, the company’s margins remain far above its 10-year average of 62%. The dip was primarily due to product mix and adjustments related to the Blackwell rollout, but Nvidia’s forecast for the remainder of the year shows margins remaining in the mid-70% range.
While Nvidia has projected third-quarter revenue growth of 79%—down from the triple-digit growth seen in previous quarters—this is still an exceptional performance. Investors who expected the company to sustain an unsustainable growth rate might be concerned, but many analysts view the company’s continued strength as a positive indicator.
Nvidia’s stock is currently trading at 57 times earnings, leading some to believe it is overvalued. However, this is consistent with the stock’s historical average, which has seen massive gains over the past decade. Furthermore, looking ahead to the next fiscal year, Nvidia’s forward price-to-earnings ratio drops to less than 29 times, based on Wall Street’s projected earnings. This is considered a bargain given the company’s growth potential.
