Nvidia Stock Has Taken a Beating. Buy the Dip?

In January, I warned investors to tread carefully when it came to Nvidia (NVDA 1.74%) shares. The tech stock's valuation left almost no room for error. Even though the business is seeming to fire on all cylinders, I concluded that Nvidia shares might not be a great investment since its premium valuation is already pricing in strong growth for years to come. But what about now? As of this writing, shares have fallen about 13% since that article was published. Has the stock's meaningful haircut made shares attractive? Unfortunately, Nvidia stock's valuation arguably still seems too rich. What Nvidia is doing right One thing Nvidia continues to get right is growth. Sales and profits soared in the company's most recent quarter, its fourth quarter of fiscal 2025. Revenue is booming for Nvidia, largely fueled by the increasing demand for its data center graphics processing units (GPUs), which dominate the AI (artificial intelligence) accelerator market. Its fiscal fourth-quarter revenue surged 78% year over year to reach $35.1 billion, while Nvidia's total fiscal-year revenue increased by an impressive 114%, hitting $130.5 billion. Such robust growth has bolstered earnings. Nvidia saw its net income jump 82% year over year for its fiscal fourth quarter to $22.09 billion, or $0.89. Two big risks With the stock priced at about 40 times earnings as of this writing, shares may not seem that expensive when viewed next to the company's recent torrid growth. But a closer look under the hood shows two big risks that arguably merit a lower valuation. First of all, as Nvidia grows, the pace of its expansion appears to be decelerating. The company's fourth-quarter year-over-year revenue growth rate of 78%, for instance, is down from 94% growth in the quarter ended three months earlier and 265% in the year-ago period. Another issue is gross profit margin. As competition intensifies and as supply of AI chips closes in on demand, costs may rise as Nvidia fights to maintain its technical leadership. Furthermore, prices could come down as price becomes more important in an increasingly competitive marketplace. To this end, Nvidia's gross profit margin in its most recently reported quarter contracted from 76% in the year-ago period to 73%. If Nvidia continues to face slowing revenue and narrowing margins simultaneously, the company's earnings-per-share growth rates could come down very fast. Stay on the sidelines At 40 times earnings, Nvidia's valuation assumes spectacular execution not just for the next few years but for the next decade -- something that could happen but is not guaranteed. Since technology companies like Nvidia are inherently difficult to predict, it makes sense to wait to see if shares drop to a price low enough to price in some of these risks more meaningfully. Nvidia's growth, while still impressive, is slowing. And with rising competition in AI chips, the company's pricing power could weaken, putting additional pressure on its margins. If revenue growth keeps decelerating and margins contract further, today's multiple could start to look even more stretched. Of course, it's also worth considering how much of Nvidia's current success is tied to an unusually hot AI market. Right now, demand for AI chips is largely outpacing supply, allowing Nvidia to dominate. But that dynamic won't last forever. Other semiconductor giants are catching up (although they still have a long way to go), and as they do, the pricing and profitability landscape could shift dramatically. None of this is to say Nvidia isn't an outstanding company. It is. The question is whether it's a good investment at today's price. Unfortunately, I'm not convinced the risk-reward trade-off is attractive at this price. For investors looking for AI exposure, waiting for a better entry point -- or seeking alternatives at more reasonable valuation -- could be the smarter move.