Nvidia’s Stock: Growth Trends Amidst Market Volatility
Last week, Nvidia (NASDAQ: NVDA) experienced an exciting yet tumultuous trading session. The stock surged in value ahead of its earnings report on February 26, then saw a notable decline of 8.5% in the next session, before rebounding to recover nearly half of its loss by Friday.
By the end of this three-day period, the stock settled with a modest decline of just 1.4%. This trend reflects a mixed sentiment among investors regarding Nvidia’s recent performance, guidance, and management remarks during the earnings call.
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Understanding the Investment Landscape
Wall Street often fixates on quarterly results, sometimes overstating small shifts in key financial metrics. A more insightful approach is to assess these results within the broader investment narrative.
Here are five reasons why Nvidia continues to excel and remains a compelling growth stock to consider today.
Image source: Getty Images.
1. Strong Customer Spending on AI Solutions
Nvidia’s remarkable growth over the past years largely stems from increased investment in graphics processing units (GPUs) by a select group of customers.
According to Nvidia’s 10-K annual report for fiscal 2025 (ending January 26, 2025), the company noted, “Sales to direct Customers A, B, and C represented 12%, 11%, and 11% of total revenue, respectively, primarily attributed to the Compute & Networking segment.”
These significant clients likely include hyperscalers like Amazon, Microsoft, Alphabet, and Meta Platforms, known for ramping up capital expenditures (capex). For instance, Meta is projecting $65 billion in capex for 2025, while Alphabet anticipates $75 billion. Likewise, Microsoft plans for approximately $80 billion, while Amazon’s forecast stands at roughly $100 billion.
Meta is focused on enhancing its AI infrastructure to support generative AI initiatives, boost app engagement, and elevate Instagram as a prime avenue for advertisers. Concurrently, Amazon Web Services, Microsoft Azure, and Google Cloud are relying on Nvidia’s chips to power their expansive data centers.
While Nvidia’s reliance on a limited customer base could indicate risk, it is also a distinct advantage; these clients are financially robust and capable of maintaining their investments even through economic downturns, unlike smaller competitors.
2. Limited Competition in the Market
Competition is often viewed as one of the main challenges for Nvidia. Opponents that offer similar capabilities could potentially diminish Nvidia’s revenue growth and margins. However, this threat has not yet materialized.
Advanced Micro Devices (AMD) continues to project significant growth in its data center GPU segment, attempting to gain market share from Nvidia by offering cost-efficient solutions. Unfortunately for AMD, it has not yet achieved its targets, as reflected by its stock hovering around a 52-week low, down over 55% from its peak in March of the previous year.
In contrast, Broadcom is making strides in AI, notably through application-specific integrated circuits (ASICs), which can be more cost-effective than GPUs. However, Broadcom’s positioning is more diversified and it is not a direct competitor to Nvidia as a purely focused AI company.
Meanwhile, Intel has been unable to gain traction in the GPU arena.
Nvidia’s capacity to capture a larger share of AI investments highlights its superior product lineup and ongoing innovation. Notably, Nvidia’s latest AI chip, Blackwell, generated $11 billion in revenue in the recent quarter, demonstrating the fastest ramp-up in the company’s history. Rather than resting on past successes, Nvidia continues to advance in product development, a promising sign for sustaining its market dominance during any cyclical shifts.
3. Elevated Margins and Rapid Revenue Growth
One reason for Nvidia’s stock decline following its earnings report may have been investor concern over a dip in gross margins.
In the fourth quarter of fiscal 2025, Nvidia reported gross margins of 73%, a decrease of three percentage points from the same period in fiscal 2024. However, the company averaged a full-year gross margin of 75% against 72.7% from the previous fiscal year. Looking ahead, Nvidia expects first-quarter fiscal 2026 gross margins of about 70.6%.
These lower margins are not indicative of underlying business troubles. As Nvidia CFO Colette Kress summarized in the latest earnings call:
During our Blackwell ramp, our gross margins will be in the low 70s. At this point, we are focusing on expediting our manufacturing to ensure timely delivery to customers. Once our Blackwell operations are optimized, we can enhance our cost management and gross margins. We expect to improve to mid-70s margins later this year.
High margins play a critical role in Nvidia’s investment case, enabling the company to convert over 60% of revenues into operating profit, making it exceptionally lucrative.
As shown in the chart, Nvidia has significantly increased sales, operating margins, and diluted earnings per share in recent years.
NVDA Revenue (TTM) data by YCharts.
This impressive performance makes Nvidia a strong value opportunity, despite its elevated stock price.
4. Valuation Perspectives
Valuing Nvidia is a complex task. The stock appears to be a bargain if the company can sustain its growth trajectory, even at a reduced pace. Conversely, if overall spending diminishes due to heightened competition or an economic slowdown, Nvidia might be perceived as overvalued.
Nevertheless, a degree of this uncertainty seems factored into Nvidia’s current valuation. With a forward price-to-earnings (P/E) ratio of 27.8, it remains lower than comparable giants such as Amazon, Apple, Broadcom, and Microsoft.
Nvidia’s Resilient Financial Position Amid Market Volatility
AMZN PE Ratio (Forward) data by YCharts.
Compared to giants like Taiwan Semiconductor Manufacturing and AMD, Nvidia remains unmatched. Despite lower forward earnings ratios, no major tech or semiconductor company approaches Nvidia’s blend of market dominance, revenue growth, and robust profit margins.
Exceptional Financial Health
Nvidia concluded fiscal 2025 with an impressive $8.6 billion in cash and cash equivalents, supported by $34.6 billion in marketable securities and just $8.5 billion in long-term debt.
This financial strength is underscored by a significant increase in interest income, which soared from $866 million in fiscal 2024 to $1.8 billion in fiscal 2025. This means Nvidia is generating income from assets rather than paying interest on debt, contrasting sharply with competitors reliant on borrowed capital during challenging economic conditions.
The company’s solid balance sheet is particularly noteworthy given the timing of its product innovations. Nvidia does not rely on debt to fund new developments; instead, its substantial cash flow from high-margin products supports ventures like Blackwell. This ability to invest without incurring debt gives Nvidia a competitive edge, especially during potential economic downturns, allowing continued investment in science and technology that less financially healthy companies cannot afford.
Current Market Conditions Present a Buying Opportunity
Nvidia’s stock remains attractive for investors with a long-term view, particularly those confident in sustained growth in AI spending. Even if there’s a gradual decline in sales growth and profit margins, Nvidia could still present value due to its relatively low valuation compared to growth potential.
Investors considering Nvidia should aim for a three- to five-year investment horizon. It’s important to note, however, that the stock’s price could be volatile, so a high degree of risk tolerance and patience is essential.
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Randi Zuckerberg, a former director at Facebook and sister to Meta Platforms CEO Mark Zuckerberg, sits on The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is also a board member. Daniel Foelber holds no positions in the mentioned stocks, while The Motley Fool has interests in Nvidia, Advanced Micro Devices, and others. Further, The Motley Fool recommends Broadcom and various options trades involving Microsoft and Intel. Full disclosure policy can be found on their website.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
