Nvidia (NVDA) has emerged as a stock market titan, primarily due to its dominance in one of the fastest-growing sectors today: artificial intelligence (AI). This burgeoning market, currently valued at around $200 billion, is projected to soar to $1 trillion by the end of the decade, according to industry analysts. Nvidia has successfully established a robust empire of AI products and services, encompassing everything from hardware and software to networking tools, designed to cater to every customer at every stage of their AI journey. CEO Jensen Huang has aptly described the company as the "on ramp to the AI world." At the heart of Nvidia's success are its graphics processing units (GPUs), renowned for being the fastest chips available, which power essential AI tasks such as model training and inferencing.
Nvidia's impressive product offerings have attracted an array of high-profile clients, including tech giants Microsoft and Amazon, significantly contributing to the company's revenue stream. In fact, Nvidia reported a remarkable triple-digit revenue gain, surpassing $130 billion in the recently concluded fiscal year, marking a new record for the company. This financial success has been mirrored in the stock market, with Nvidia's shares skyrocketing by an astonishing 1,500% over the past five years. However, as Nvidia's stock began trading at levels many investors deemed excessive, recent economic concerns have led to a decline in stock prices, positioning Nvidia at its lowest valuation relative to forward earnings estimates in over a year. This begs the question: has the stock become too cheap to ignore?
To understand Nvidia's current standing, it's essential to look back at its journey. Initially, this tech powerhouse focused primarily on the video gaming industry, supplying GPUs to enhance gaming experiences. However, as the versatility of these chips became apparent, Nvidia expanded its horizons by developing the parallel computing platform CUDA. This innovation paved the way for GPUs to serve the AI community, resulting in a surge of demand for Nvidia's high-performance chips. A testament to their popularity came from Oracle co-founder Larry Ellison, who shared an anecdote about a dinner with Huang, where he and Elon Musk implored for more chips due to soaring demand.
The appetite for Nvidia's latest innovation, the Blackwell architecture, has reached unprecedented levels, as Huang noted in a recent CNBC interview. During the company's latest earnings call, it was revealed that Blackwell generated an impressive $11 billion in revenue during its first quarter. Despite the high costs associated with launching such a complex and customizable product, Nvidia managed to maintain a gross margin above 70%, reflecting its strong profitability.
Despite its stellar performance, Nvidia has encountered several headwinds in recent weeks. One notable development was the announcement from start-up DeepSeek that it had successfully trained its model using Nvidia's lower-priced GPUs. This raised investor concerns about potential revenue declines as other companies might replicate this approach. Additionally, challenges arose from the Trump administration's commitment to uphold and potentially strengthen export controls on chips to China, posing another hurdle for Nvidia. Furthermore, the implementation of tariffs on imports from key trading partners heightened worries about economic growth and the profitability of companies like Nvidia that manufacture goods overseas. Consequently, Nvidia's stock has experienced a decline of approximately 14% over the past month, leading to a decrease in its valuation; it now trades at just 24 times forward earnings estimates, marking its most affordable level in over a year.
This leads us back to the critical question: is Nvidia too cheap to ignore, or do the aforementioned challenges warrant caution for potential investors? Fortunately, the concerns surrounding DeepSeek appear to have subsided, as major Nvidia clients have recently communicated their ongoing investments in AI, with no indications of scaling back their commitments. In fact, spending on AI technology is on the rise, with Meta Platforms announcing plans to invest up to $65 billion this year, aiming to end the year with 1.3 million GPUs. While the chip export controls have impacted Nvidia's revenue in China since their introduction in 2022, the company continues to report robust revenue growth in other global markets.
Lastly, while Trump's tariffs may pose challenges for Nvidia and other U.S. companies, it's essential to recognize that the current trade war is likely a temporary obstacle. Trump's recent delays in implementing tariffs on products under the United States-Mexico-Canada Agreement indicate potential flexibility in their enforcement. Analyzing Nvidia's overall performance and market behavior, all signs appear positive. The company continues to report record earnings quarter after quarter, with its market leadership and commitment to innovation suggesting sustained growth for the foreseeable future. Therefore, at its current price point, Nvidia may indeed be too cheap to ignore, presenting a compelling opportunity for long-term investors.
