Nvidia pulled back despite exceeding previous elevated expectations.
When it comes to stocks where investors appear to have taken an interest too late, most will probably think of Nvidia (NVDA 1.51%). The stock has surged higher by more than 950% since late 2022, when it emerged as the dominant company for AI chips. Moreover, its fiscal second-quarter revenue and earnings exceeded expectations, a result likely to keep the semiconductor stock‘s valuation in the stratosphere.
Nonetheless, the growth of the subsector it spearheaded, AI chips, is massive. Thus, investors should take a closer look at Nvidia to see if they are truly too late to capitalize on Nvidia’s remaining growth potential.
Nvidia’s phenomenal results
Much like previous quarters, Nvidia delivered impressive results for the second quarter of fiscal 2025 (ended July 28). The company continues to benefit from solid demand for its Hopper chip and has begun shipping samples of its highly anticipated Blackwell chip to its customers and partners.
Given that demand, it may not surprise investors that Allied Market Research forecasts a compound annual growth rate (CAGR) of 38% for the chip market through 2032. This is far above the 6% CAGR Allied predicts for the overall semiconductor market through 2031.
Not surprisingly, Nvidia’s results far exceed that forecast, as revenue came in at $30 billion. This was a 122% increase from year-ago levels and significantly above the $28 billion it forecast just three months ago. Furthermore, $26 billion of that revenue came from its data center segment, which includes its AI chips, and that climbed 154% year over year.
Also, net income for fiscal Q2 was nearly $17 billion, rising 168% from the same quarter last year as Nvidia limited the increases in the cost of revenue and operating expenses. Additionally, the company now anticipates $32.5 billion in revenue for fiscal Q3, indicating its massive growth will continue.
Market reaction
Nonetheless, despite the strong earnings report, the reaction of the market will likely make new investors nervous. The strength of the numbers was not enough to satisfy investors, and the stock fell following the news.
Moreover, even with its huge growth, some of the valuation metrics may make investors reluctant to bid the stock higher, regardless of its circumstances.
This is not because of the P/E ratio, which, at 72, is surprisingly low given the stock’s rapid profit growth. However, its price-to-sales (P/S) ratio of 38 far exceeds other AI chip companies such as AMD at 10 times sales and Qualcomm at a 5 P/S ratio.
The contrast is starker when comparing the price-to-book value ratios. AMD and Qualcomm sell at 4 times and 8 times book value, respectively. This is a small fraction of Nvidia’s price-to-book value ratio of 61! Considering such a valuation, one can see why investors may hesitate to bid Nvidia higher in the near term despite its incredible performance.
Additionally, this has occurred amid considerable share buybacks. Nvidia spent $15 billion on share repurchases in the first half of fiscal 2025. The company has also pledged an additional $50 billion for further share buybacks on top of the $7.5 billion remaining from the previous authorization.
Reducing the number of outstanding shares should mitigate the impact of any downtrends in the stock. Hence, the fact that investors have turned on the stock despite this bullish news may speak to how overvalued Nvidia stock has become.
Are investors too late?
Given the state of the stock, investors should assume they are too late, at least for now.
Admittedly, the 38% CAGR in the AI chip market makes it likely Nvidia will benefit from robust growth for several years to come. If the stock goes into a bear market, investors should start dollar-cost averaging.
Unfortunately, at its current price, it is priced for perfection or possibly priced beyond perfection when taking the fiscal Q2 earnings report into account. Ultimately, it is quite difficult to justify a price-to-book value ratio of 61, even for a “perfect” stock.
With that in mind, investors should keep Nvidia — along with its price-to-book value ratio — on a watch list and hold off buying until the valuation comes down significantly from these lofty levels.
Will Healy has positions in Advanced Micro Devices and Qualcomm. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia, and Qualcomm. The Motley Fool has a disclosure policy.