Nvidia (NASDAQ: NVDA) is coming off yet another strong quarter, with incredible growth on both the top and bottom lines. Demand for its artificial intelligence (AI) chips remains high, leading to an acceleration of its growth rate. It generated 85% revenue growth in the first quarter of Fiscal 2027 (which ended on April 26), which was better than the 73% growth it posted a quarter earlier.
But despite the impressive performance, the stock has been down in the days following the release of its most recent earnings report. What’s going on with Nvidia’s stock?
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Investors may be bracing for headwinds
On the surface, a solid earnings beat and an acceleration of its growth rate should normally send a stock’s value higher. The challenge with Nvidia is that investors already have high expectations for the business, and they may be more concerned about what lies ahead for the company. In its Q1 filing, Nvidia warned that “some of our customers are developing their own ASICs and other products, including designs optimized for certain workloads that may not require all of the features and functionality our data center systems provide.”
A rise in competition could not only chip away at Nvidia’s growth but also its margins, which may hinder its ability to significantly grow its earnings in the future. Much of the bullishness behind buying Nvidia’s stock centers around expectations, and if there are growing question marks about its future growth, then that may impact the stock more heavily than its most recent earnings numbers.
Nvidia’s stock appears cheap, but only if you believe analyst projections
It may seem odd to consider the most valuable company in the world cheap. At $5.2 trillion in market cap, Nvidia is rich based on valuation, but investors point to its forward price-to-earnings multiple of 25 as evidence that the stock is cheap. Its price-to-earnings-growth (PEG) multiple of 0.66 also suggests that it’s a bargain when looking at its projected growth over the next five years.
If, however, there’s a slowdown in tech spending or the company faces an increase in competition, that will inevitably impact those projections and expectations. Thus, if there are any early hints that may be the case, investors may be tempted to pull out some money and cash out their gains.
The risk with investing based on analyst projections is that they aren’t a sure thing and can change over time. Any early signs that the business’s growth prospects may not be as rosy as what’s priced into the stock could impact its valuation, which is what may be happening with Nvidia’s stock right now. While it’s a fantastic business, it’s only a cheap investment if you are still expecting robust growth from it for the foreseeable future. Buying the stock based on high expectations comes with risk, which is why I’d hold off on buying shares of Nvidia, despite the company’s strong performance.
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David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
Why Even 85% Revenue Growth Isn’t Enough to Make Nvidia’s Stock Take Off was originally published by The Motley Fool