Caution advised on high valuation of Nvidia stock despite strong performance

From Nasdaq: 2025-03-20 07:03:00

In January, caution was advised for investors considering Nvidia (NASDAQ: NVDA) shares due to the high valuation. Despite strong performance, the stock’s premium price already factored in significant future growth potential. Since then, shares have dropped by 13%, but the valuation remains high, suggesting caution is still warranted.

Nvidia’s growth continues to impress, with sales and profits soaring in the latest quarter. Revenue surged by 78% year over year, reaching $35.1 billion for the fiscal fourth quarter of 2025. However, the stock’s current valuation at about 40 times earnings raises concerns about sustainability and potential risks in the future.

Two significant risks for Nvidia include decelerating revenue growth rates and contracting gross profit margins. The company’s expansion appears to be slowing down, and as competition intensifies in the AI chip market, maintaining technical leadership may become more challenging. These factors could impact the company’s earnings-per-share growth in the long run.

With Nvidia’s valuation assuming exceptional performance for the next decade, investors should consider the risks associated with slowing growth and narrowing margins. Waiting for a better entry point or exploring alternatives with more reasonable valuations may be a prudent strategy. The competitive landscape in AI chips is evolving, and Nvidia’s dominance may face challenges in the future.

As of now, investing $1,000 in Nvidia may not be the best option, according to the Motley Fool Stock Advisor analyst team. The team identified 10 other stocks with potential for significant returns, excluding Nvidia. Considering the risks and uncertainties surrounding Nvidia’s future growth, exploring alternative investment opportunities could be a more strategic move for investors.



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