5 Reasons Why Nvidia Is Still in a League of Its Own

Last week was a roller coaster ride for Nvidia (NASDAQ: NVDA). The stock popped before reporting earnings on Feb. 26, fell 8.5% the following session, and then recovered nearly half of that loss on Friday.

Once the dust had settled, the stock was down just 1.4% over the three-day period — a sign that investors were somewhat neutral on Nvidia’s latest print, guidance, and management commentary on the earnings call.

Wall Street can get enamored by quarterly results and overemphasize slight changes in key metrics. A better approach is to view quarterly results within the context of the overarching investment thesis.

Here are five reasons why Nvidia remains at the top of its game and is a growth stock worth buying now.

Nvidia’s exponential growth in recent years wouldn’t have been possible without a surge in spending on graphics processing units (GPUs) from a handful of customers.

In its fiscal 2025 (ended Jan. 26, 2025) 10-K annual report, Nvidia said: “Sales to direct Customers A, B, and C represented 12%, 11%, and 11% of total revenue, respectively, for fiscal year 2025, all of which were primarily due to the Compute & Networking segment.”

These unnamed companies are most likely hyperscalers, such as Amazon, Microsoft, Alphabet, and Meta Platforms — all of which are well-known Nvidia customers and are ramping capital expenditures (capex). In their current fiscal years, Meta is guiding for $65 billion in 2025 capex, Alphabet is forecasting $75 billion, Microsoft plans around $80 billion, and Amazon expects around $100 billion.

Meta is building out AI infrastructure to support its generative AI products, improve app engagement, and make Instagram a top platform for advertisers. Meanwhile, Amazon Web Services, Microsoft Azure, and Google Cloud are using compute power from Nvidia chips to expand their large-scale data centers.

While Nvidia’s dependence on just a handful of companies can be viewed as a risk, it is also an advantage because they are reliable buyers with deep pockets. These companies have the resources to invest even during cyclical slowdowns, whereas smaller players may not be as flexible.

One of the biggest threats to Nvidia’s business model is competition. Formidable competition could eat away at Nvidia’s top-line growth and cut into margins. But so far, that hasn’t happened.

Advanced Micro Devices continues to forecast exponential growth in its data center GPU business, especially if it can take market share from Nvidia by delivering high compute power at a lower price point. But so far, AMD simply isn’t delivering results, and its stock price reflects investor disappointment. AMD is hovering around a 52-week low, down over 55% from its all-time high from March of last year.

In comparison, Broadcom is experiencing exponential growth in AI, especially in application-specific integrated circuits (ASICs). ASICs are custom-engineered for specific tasks and can be less expensive than GPUs. But Broadcom isn’t as much of a pure-play AI name as Nvidia. Rather, it is a diversified networking company with a fast-growing AI segment.

Meanwhile, Intel has failed to make a splash in the GPU market.

Nvidia’s ability to capture a larger percentage of AI spending is a testament to its elite product portfolio and continued innovation. Blackwell — Nvidia’s latest chip, designed for AI and data centers — delivered $11 billion in revenue in the latest quarter, the fastest product ramp in company history. Instead of sitting back and enjoying its success, Nvidia continues to push the boundaries of new product development. That’s a great sign that it can maintain its dominance, even if there’s a cyclical slowdown.

One reason Nvidia may have sold off the day after reporting earnings was a knee-jerk reaction to lower gross margins.

For the latest quarter, fourth-quarter fiscal 2025, Nvidia reported 73% gross margins. That’s down three percentage points compared to the same quarter in fiscal 2024. But for the full year, gross margins were 75%, compared to 72.7% in fiscal 2024. However, Nvidia is guiding for just 70.6% gross margins in the first quarter of fiscal 2026.

The lower margins have nothing to do with any fractures in the business. As Nvidia CFO Colette Kress explained on the latest earnings call:

During our Blackwell ramp, our gross margins will be in the low 70s. At this point, we are focusing on expediting our manufacturing to make sure that we can provide to customers as soon as possible. Once our Blackwell fully rounds, we can improve our cost and our gross margin. So, we expect to probably be in the mid-70s later this year.

Margins have been an integral aspect of Nvidia’s investment thesis. High margins allow the company to convert over 60% of sales into operating income, making Nvidia an immensely profitable business.

As you can see in the chart, Nvidia has grown sales, operating margins, and diluted earnings per share exponentially over the last few years.

This impressive growth is why Nvidia remains a good value despite its soaring stock price.

Nvidia is, admittedly, a difficult stock to value. The stock is a bargain if it maintains its growth, even at a lower rate. But if spending fizzles out due to competition, a cyclical slowdown, or AI models needing less computing power, then Nvidia could be overvalued.

Still, some of that uncertainty is arguably already priced into Nvidia’s valuation. Nvidia sports a 27.8 forward price-to-earnings (P/E) ratio — lower than Amazon, Apple, Broadcom, and Microsoft.

Chip companies like Taiwan Semiconductor Manufacturing and AMD are cheaper than Nvidia on a forward earnings basis. But no mega-cap tech company or chip company has Nvidia’s combination of industry dominance, revenue growth, and margins.

Nvidia finished fiscal 2025 with $8.6 billion in cash and cash equivalents, $34.6 billion in marketable securities, and just $8.5 billion in long-term debt.

Nvidia’s interest income jumped from $866 million in fiscal 2024 to $1.8 billion in fiscal 2025 as it earned more interest on its assets. So not only does the company have a net cash position, it’s also making interest income instead of paying out cash in interest expenses. Meanwhile, high interest rates adversely affect companies whose capital structure is dependent on debt.

Nvidia’s rock-solid balance sheet is particularly impressive, considering the timing of its product ramp-up. Nvidia isn’t taking on debt to develop products in the hopes they pay off. Rather, it makes so much cash flow on its existing high-margin products that it can afford to ramp up new innovations like Blackwell with cash generated from the business, rather than debt. This is a massive advantage for Nvidia over the competition, especially if there’s a cyclical downturn, because Nvidia can continue pushing the bounds of science and technology. Companies with poorer financial health couldn’t do so.

Nvidia continues to be a no-brainer buy for investors confident in sustained long-term AI spending. Even if sales growth and margins fall gradually over time, Nvidia could still be a great value because the stock isn’t expensive.

Investors with at least a three- to five-year investment time horizon should take a closer look at Nvidia. However, it’s worth keeping in mind that the stock price could continue to be highly volatile, so risk tolerance and patience are paramount.

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. 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. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Intel, Meta Platforms, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls on Microsoft, short January 2026 $405 calls on Microsoft, and short May 2025 $30 calls on Intel. The Motley Fool has a disclosure policy.

5 Reasons Why Nvidia Is Still in a League of Its Own was originally published by The Motley Fool