Last week was quite a ride for Nvidia (NVDA), experiencing all sorts of ups and downs. Before their earnings report on February 26, the stock surged, only to plummet by 8.5% the next day. By Friday, it had clawed back almost half of that dip. When the smoke cleared, Nvidia’s shares had only slipped by 1.4% over those few days, suggesting that investors weren’t overly impressed or disappointed with the latest earnings results and future guidance from the company’s management.
On Wall Street, there’s often an exaggerated focus on quarterly results, with too much being made of minor fluctuations in key metrics. A wiser strategy is to consider these outcomes in the context of the broader investment thesis. Here are five reasons why Nvidia continues to excel and why it’s a growth stock that still holds good potential for investors.
1. Nvidia’s Customers Are Investing Heavily in AI
Nvidia’s stunning growth story wouldn’t be what it is without considerable investments in graphics processing units (GPUs) by a select group of customers. In their fiscal 2025 annual report, Nvidia highlighted that sales to major customers, which likely include giants like Amazon, Microsoft, Alphabet, and Meta Platforms, contributed significantly to their revenue, particularly in the Compute & Networking segment. These tech behemoths are pouring massive budgets into capital expenditures, with Meta aiming for $65 billion, Alphabet $75 billion, Microsoft $80 billion, and Amazon $100 billion in the coming fiscal year. Each is enhancing their AI infrastructure – Meta for its AI products and Instagram engagement, and the others for bolstering cloud computing services. While relying on these few firms might seem risky, these are dependable partners with the financial strength to invest even during economic slowdowns, a luxury smaller firms typically lack.
2. Minimal Competition for Nvidia
Competition is often a looming threat to Nvidia’s business, as it could disrupt revenue growth and squeeze profit margins. However, this hasn’t materialized so far. Although Advanced Micro Devices (AMD) has ambitious plans to expand its data center GPU business and compete on price and performance, it hasn’t delivered the expected results, as reflected in its stock performance. Meanwhile, Broadcom is flourishing with AI applications, particularly application-specific integrated circuits (ASICs), yet they don’t directly challenge Nvidia due to their diversified business model. Intel hasn’t made significant strides in the GPU scene either. Nvidia’s dominance in AI spending is illustrated by their latest Blackwell chip, setting revenue records and showcasing the company’s relentless innovation. Despite their success, Nvidia persistently strives for new product development, indicating its potential to remain ahead, despite potential market cycles.
3. Impressive Margins and Rapid Revenue Growth
Some investors reacted negatively to Nvidia’s earnings, particularly to slightly lower gross margins, but these remain impressive. In the fourth quarter of fiscal 2025, gross margins were 73%, slightly down from the previous year, and are projected to be around 70.6% for the start of fiscal 2026, primarily due to the Blackwell product ramp. According to CFO Colette Kress, this is a temporary phase as the company focuses on quickly supplying the market with its chips. Margins, a key part of Nvidia’s appeal, have traditionally translated into substantial operating income, marking the company as a highly profitable entity. Nvidia’s remarkable growth in sales, margins, and earnings per share over recent years underscores its enduring value, even amid a lofty stock valuation.
4. A Valuation That Remains Attractive
Valuing Nvidia can be tricky. While its current trajectory suggests it could be a bargain, challenges like competition, market slowdowns, or reduced demand for computing power could shift this outlook. That said, some of these uncertainties might already be included in Nvidia’s valuation. The company boasts a forward price-to-earnings ratio of 27.8, positioning it below other tech titans like Amazon, Apple, Broadcom, and Microsoft. While companies like Taiwan Semiconductor Manufacturing and AMD offer cheaper forward valuations, none match Nvidia’s combination of market dominance, robust revenue growth, and healthy margins.
5. A Rock-Solid Financial Position
Nvidia ended fiscal 2025 with a strong financial standing: $8.6 billion in cash, $34.6 billion in marketable securities, and only $8.5 billion in long-term debt. Their interest income rose significantly, benefiting from higher rates, and the company is generating cash flow rather than servicing debt. Unlike others that might rely on borrowing for expansion, Nvidia harnesses its ample cash flow from successful operations to fund new advancements like the Blackwell initiative. This financial strength is a significant competitive advantage, allowing continued innovation even amid potential economic downturns, outpacing less financially stable rivals.
Nvidia’s recent downturn in stock price could present a compelling buying opportunity for those who believe in a future of sustained AI investment. Despite the potential for fluctuating growth and margins over time, Nvidia’s stock doesn’t seem overpriced for long-term investors: those with patience and an eye on the next three to five years. It’s important to remember, though, that the stock could remain volatile, demanding a mindful approach to risk and patience in investing decisions.
