Nvidia’s stock is rising due to solid fundamentals and AI growth potential, but caution is needed given the high market euphoria and projections and the tech industry’s cyclical nature.
- Despite market euphoria and high valuations, Nvidia’s stock continues to rise, outperforming other tech giants like Amazon and Tesla.
- Solid fundamentals and growth potential in AI and data centers justify much of Nvidia’s current valuation and investor attention.
- While Nvidia’s future looks promising, caution is advised due to high projections and the cyclical nature of the tech industry.
In recent days, the concept of the “magnificent seven” has been challenged. The seven companies have distancing themselves in terms of prospects and profitability, and we are closer to something like “the chosen one.”
While giants like Amazon (NASDAQ:AMZN) and Tesla (NASDAQ:TSLA) have shown disappointing performances, stagnating and retracting nearly 9% over the last 30 days, respectively, Nvidia (NASDAQ:NVDA) continues to rise, surpassing $1,100 with a gain of approximately 30% in the same period.
But the question remains: Is Nvidia stock a mania, or is there solid grounding for this growth?
Market Euphoria Over Nvidia
There’s no denying the euphoria surrounding Nvidia’s stock. We all know that money is a scarce resource (Economics 101), so if I’m heavily investing in Nvidia, I’m likely diverting funds from other tech companies like AMD (NASDAQ:AMD). Currently, Nvidia is drawing in capital and attention at the expense of its peers.
Is this attention deserved? Absolutely. However, there is a component of euphoria, with memes suggesting that only Nvidia’s results can save the market and extremely optimistic comments on social media, as if the company will continue to rise indefinitely. This optimism is also reflected in the company’s projections, which are trading at relatively high multiples, with a P/E ratio close to 42x for the next 12 months.
Looking ahead to 2025, this multiple drops to 32x and by 2026 to around 28x. In other words, it will take a few years for Nvidia to be traded at a more typical tech company multiple (in line with the XLK, for example), and it’s worth noting that it is already the third-largest company in the world. This impressive projected growth continues to be revised upwards (so far, well justified).
Solid Grounds for Optimism
Despite the euphoria and optimism in some projections, Nvidia’s fundamentals are strong. As CEO Jensen Huang mentioned during past earnings calls, Nvidia’s market is only set to expand in the coming years, and we are just at the beginning. Many industries have yet to invest heavily in AI, and Nvidia has several avenues for growth, such as Sovereign AI and GPU updates, including the new Blackwell architecture.
Studies back this up. Various reports, such as those from Allied Market Research and Grand View Research, suggest that the Data Center market will continue to grow at a rapid pace until 2030, with a CAGR of 10%- 11%. This doesn’t even mention Nvidia’s other growth avenues, like autonomous machines and gaming, which, though less significant, are still relevant and have favorable trends.
Considering that this technology is here to stay and that Nvidia will likely continue to lead the market for a considerable time (thanks to its moats like technological barriers, partners, and solid fundamentals), in 2026, the company should still be traded at a high earnings multiple—a premium compared to less relevant, lower-quality companies with worse prospects.
If Nvidia is still at the forefront with robust margins and extraordinary CAGRs by 2026, it’s unlikely we’ll see the company trading at a low multiple. Even though 28x might seem modest for something that will only happen in two years, it remains reasonable considering all these aspects, which were further reinforced by the Q1 earnings.
Euphoria, But Not a Mania
Given the above information, there is indeed euphoria surrounding Nvidia’s stock, but this does not mean we are facing a baseless mania. On the contrary, the company has solid foundations and a robust growth outlook for the coming years, which certainly justifies much of the attention it receives and its premium valuation.
It’s necessary to mention that the stock’s margin of safety is low, considering that the projections driving the stock price are increasingly high (raising the bar and making it more challenging for the company to comfortably exceed expectations, especially if any negative surprises occur).
In theory, Nvidia’s business is cyclical, going through years of heavy investment (CapEx for companies investing in building AI infrastructure), and as promising as it is, there could eventually be disappointing results that dampen market expectations.
While I like the company and see a bright future for it, it’s important to exercise caution and not get carried away by sentiment. Investing in Nvidia can be a good decision, but it’s necessary to be prepared for possible fluctuations and understand that maintaining stock price increases is intrinsically linked to the company meeting or exceeding growth expectations.
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content)
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