In the past few years, Nvidia (NASDAQ: NVDA) has been one of the hottest stocks, thanks to astronomical growth. However, shares fell after the chipmaker announced fiscal second-quarter earnings last week, despite extraordinary growth that exceeded analysts’ expectations. The market was not impressed.
Let’s take a closer look at the company’s latest quarterly results and the one risk that appears to be weighing on investors’ minds.
Significant revenue growth continues
For its fiscal second quarter, Nvidia saw sales rise 122% year over year to $30 billion. Adjusted earnings per share (EPS) came in at $0.68, up 152%. Now admittedly that’s a drop from the 262% revenue growth and 461% adjusted EPS growth in Q1, but it’s still incredible growth.
The data center business once again led with revenue rising 154% to $26.2 billion. The company attributed the growth to the Hopper Graphic Processing Unit (GPU) computing platform, and in the quarter began ramping up the newest chip H200 Hopper.
Gross margin fell sequentially as Nvidia ramped up its new Blackwell chips, but remained at 75.1%. That’s down from 78.4% in Q1.
Nvidia also generated a lot of cash, with operating cash flow of $14.5 billion in the quarter. Free cash flow came in at $13.5 billion.
It ended the quarter with net cash and marketable securities of $26.3 billion. It also announced a new $50 billion share buyback program.
Going forward, the company guided for Q3 revenue of $32.5 billion, led by Hopper growth and the shipment of new Blackwell architectural prototypes. Blackwell called the demand “extraordinary” and said the transition to next-generation architectures will be smooth, with demand for Hopper and Blackwell chips expected to remain strong.
Nvidia noted that it needs to replace Blackwell to improve production results but expects production to increase in the fourth quarter. It says no functional changes are required. The last quarter, indicates production will increase in Q3. It now expects to realize several billion dollars in Blackwell revenue in Q4. This is good news and allays fears of a longer delay.
It is predicted that the data center business will continue to grow over the next year and beyond. He notes that the computing power for the next generation of large language models (LLM) will require 10 to 40 times the computing power of previous generations and the need for more computing power will remain.
Is now the time to buy stocks?
Despite spectacular growth, strong gross profit, and opportunities ahead, Nvidia trades at a relatively modest valuation, with a forward price-to-earnings ratio (P/E) of just 30 times next year’s analyst estimates.
Given the growing computing needs to train more complex AI models and the large tech companies spending to advance AI, Nvidia looks like it still has a long runway of growth ahead of it. Combine that with a reasonable price, and the stock looks like a buy.
The one big risk facing stocks and the question on many investors’ minds is whether all that AI spending will turn a profit for the companies that spend it. Currently, companies with cloud computing segment like Microsoft, Alphabetand Amazon who see some benefits, and companies like Meta platform and Apple also invest heavily in AI.
However, these benefits should also apply to software companies that develop AI applications and their customers. Currently, a lot of money is being spent on AI infrastructure to benefit Nvidia, but there is still debate over whether other companies will see their investment pay off. If not, then spending on AI infrastructure could eventually drop significantly.
So, while Nvidia continues to look like a buy, one thing investors will need to monitor is whether the software company’s growth can improve due to AI. If these companies don’t start to see growth pick up in the next year or so, it could be the proverbial canary in the coal mine for Nvidia’s value.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former Facebook director of market development and spokesperson and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Geoffrey Seiler has a position in Alphabet. The Motley Fool has positions and recommends Alphabet, Amazon, Apple, Meta Platform, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
These Risks Are Weighing On Investors’ Minds As Nvidia Continues To See Explosive Growth. Are Stocks Still a Buy? this was originally published by The Motley Fool
