There is a potential case for purchasing Nvidia stock after its impressive increase of over 850%. However, doing so without caution could lead to unfavorable outcomes. Here’s the outlined strategy.
Nvidia (NVDA) has established itself as the leading artificial intelligence (AI) stock over the past two years. Its market dominance in providing chips that power AI data centers has driven unprecedented growth for the company. Since the beginning of the previous year, Nvidia’s stock has appreciated by more than 850%, and this upward trend continues as the third-quarter earnings report approaches.
Investors considering investing new capital in Nvidia might feel apprehensive, thinking they have missed the best buying opportunities. However, previous investments have proven beneficial so far. With its earnings on the horizon, the question arises: Is Nvidia stock a wise purchase now? Here’s what potential investors need to consider.
Rising Nvidia Stock: Reasons Behind the Surge
Generally, the broader stock market averages an annual return of about 10%, making Nvidia’s significant leap exceptional and suggestive of a potential bubble. Still, the emergence of AI has created unique conditions for Nvidia’s growth. Many technology companies have fully adopted AI, presenting one of the most significant growth opportunities since the internet’s early days in the late 1990s. A large portion of this AI advancement relies on Nvidia’s chips, with the company holding an estimated market share of between 70% and 95%.
The company’s revenue and earnings have risen in correlation with its stock price. Nvidia’s stock continues to climb because it remains reasonably priced relative to its projected growth. Analysts’ consensus estimates for the company’s revenue continue to rise. Nvidia is expected to earn $2.82 per share this year, pricing the stock at 50 times the earnings estimates. Analysts project an average annual earnings growth of 35.6% over the next three to five years. The current valuation appears reasonable for its projected growth, highlighted by a price/earnings-to-growth (PEG) ratio of 1.4.
The compelling AI narrative enhances Nvidia’s appeal compared to more mature companies with similar earnings multiples but less growth potential.
Expectations Surrounding Nvidia on Wall Street
Nvidia’s performance must keep pace with high market expectations. The more the stock increases, the higher the market’s expectations rise. Last quarter, Nvidia surpassed Wall Street’s consensus revenue estimate by only 4.5%, marking its smallest margin since the AI boom began.
Nvidia will soon report its third-quarter earnings for the fiscal year 2025. If the company’s performance falls short of market expectations, it might primarily be due to supply constraints rather than a decline in chip demand.
The company is transitioning from its Hopper architecture, which involves the widely popular H100 chips, to its next-generation technology called Blackwell. CEO Jensen Huang has discussed Blackwell in prior earnings calls, outlining a production ramp-up starting in the fourth quarter and extending into fiscal year 2026.
Huang also highlighted that demand for Hopper remains strong, expecting shipments to increase in the third and fourth quarters. Nvidia has reportedly sold out of its Blackwell supply for the next 12 months. The most critical element of the upcoming earnings report will be updated guidance and commentary on the company’s ability to meet demand.
Considering a Buy in Nvidia: A Smart Strategy
Nvidia faces customer concentration risk, with a few large technology companies contributing significantly to its sales. However, tech leaders like Microsoft have indicated continued purchases in this AI-driven landscape.
Despite the potential volatility in its stock, Nvidia remains fundamentally appealing for long-term investments due to its AI leadership. The proposed strategy for investors is a slow and steady approach using a dollar-cost averaging strategy. This involves purchasing smaller amounts of stock regularly to balance potential price fluctuations.
Nvidia may pose higher risks at elevated levels, but a long-term mindset and structured plan can help manage these risks.
