Are Nvidia stocks worth buying now?

Some market forecasters say that Nvidia (NASDAQ: NVDA) stocks are up, and so is the artificial intelligence (AI) bull market. Wall Street has rallied around Nvidia, thanks to its dominance of AI chips. It’s the flagship company representing the emergence of large language models and other AI technologies, arguably the biggest technological leap since the internet took off in the late 1990s.

After rising for most of the past two years, Nvidia’s stock price has reversed course. The stock is down about 22% since its June 2024 peak. Buying at the bottom of a winning stock has been a successful investment strategy for years. And honestly, it’s hard to imagine the future of AI without Nvidia playing a significant role.

However, it is worth considering these risks before buying shares today.

Nvidia looks cheap, but maybe there’s a reason for that

Nvidia’s AI-friendly GPUs have become the go-to choice for tech companies building large data centers to power high-performance AI models. About $26.3 billion of Nvidia’s $30 billion in total revenue in Q2 came from the data center segment, so Nvidia has essentially become a pure AI chip player. The good news is that data center revenue grew 154% year over year in Q2 and 16% year over year, a sign that demand for the chips remains strong.

Analysts currently estimate that Nvidia will earn $2.84 per share this year and $4 per share next year. Using next year’s estimates, Nvidia is trading on a price-to-earnings (P/E) ratio of 26. If Nvidia grows earnings by 40% per year over the long term, as analysts believe, it could be viewed as a bargain.

There is an argument, however, that Nvidia’s revenue, as impressive as it may turn out to be, is risky enough that investors may want a huge margin of safety to buy the stock. A small handful of companies are supporting Nvidia’s sales. Exactly four companies account for 40% of Nvidia’s total revenue. Worse, all four of them — Microsoft, Meta Platforms, AlphabetAND Amazon — worked to create their own custom AI chips.

Margins can become a problem

These companies won’t necessarily stop using Nvidia chips altogether (although anything is possible). But Nvidia has enjoyed extraordinary pricing power since the AI ​​frenzy began early last year. AI has become a race to market that prioritizes speed.

There are signs that the AI ​​market is slowly evolving. Investors have openly questioned whether big tech companies see the returns needed to justify all that data center spending.

Market research shows that traffic to ChatGPT, once the fastest-growing app in history, has fallen in recent months. Amazon executives noted on its Q2 earnings call that AI customers want better value.

Price wasn’t a factor when AI was new, but it’s starting to become a talking point. That could mean pricing pressure for Nvidia in the future. The company may have to choose between sacrificing market share to the competition or accepting lower margins to maintain share.

This year, Nvidia is forecasting gross margins in the mid-70s, so that’s something to watch for in 2025 and beyond. You can see that these high margins far outpace anything we saw before the pandemic:

NVDA gross profit margin data according to YCharts.

It’s tempting to ignore such a long-term problem, but remember that Nvidia only looks cheap because everyone expects great sales and profits in the future. Margins returning to long-term averages would be disastrous for investors.

Should investors buy Nvidia stock today?

These concerns are not meant to dissuade you from owning Nvidia. They are raised to make you aware of the risks. While Nvidia’s financials are impressive today, they are buoyed by a few customers with deep pockets who are throwing money at it to become an early AI winner. Nvidia could be the leading AI chip company in 20 years, but sales and/or profit margins could also fall and the stock could crash.

The problem is that both assumptions may be true.

Long-term investors looking to buy into this dip should do so responsibly. Consider a dollar-cost averaging strategy to slowly accumulate shares. That way, volatility is more of an opportunity than a cause for stress. Nvidia could be in for a bumpy ride for the foreseeable future, even if it makes investors money in the long run.

Is it worth investing $1000 in Nvidia now?

Before you buy Nvidia stock, consider the following:

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John Mackey, former CEO of Whole Foods Market, a subsidiary of Amazon, is a member of The Motley Fool’s board. Suzanne Frey, chief executive officer at Alphabet, is a member of The Motley Fool’s board. Randi Zuckerberg, former chief market development officer and spokeswoman for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board. Justin Pope has no holdings in any of the stocks mentioned. The Motley Fool owns shares in and recommends Alphabet, Amazon, Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends the following options: long $395 January 2026 call options on Microsoft and short $405 January 2026 call options on Microsoft. The Motley Fool has a disclosure policy.