Nvidia's Shares Continue to Expand for Investors, Yet, Should Anticipations for 2025 be Scaled Down?
Nvidia's (NVDA 4.45%) shares have doubled in two consecutive years, with a 239% surge in 2023 and a 170% increase year-to-date. Expectations are high for another year of robust growth in 2025 as the transformation of $1 trillion worth of data center infrastructure towards advanced AI hardware occurs.
It's tempting to invest in anticipation of further gains, but let's examine Nvidia's data center division heading into the new year and understand the stock's potential.
Slowing revenue growth
Analysts project a 51% revenue increase in the upcoming financial year (up to January 2026), which is a significant increase given Nvidia's projected $129 billion revenue for this year.
Nvidia's upcoming product, Blackwell, due to launch in 2025, could potentially exceed expectations. Blackwell is a comprehensive computing platform that utilizes multiple chips for outstanding performance in generative AI, quantum computing, and other high-performance tasks.
"The demand for Blackwell is overwhelming, and we're hurrying to ramp up production to meet the extraordinary demand from our customers," commented CFO Colette Kress during the Q3 fiscal 2025 earnings call.
However, this demand may already be accounted for in analyst estimates. The main challenge for Nvidia is the comparison with Blackwell's growth, as revenue grew 94% year-over-year in Q3, decreasing from 122% in Q2 and 262% in Q1.
Where will the stock be in a year?
Kress's comments on imminent demand for Blackwell suggest that Nvidia could continue to experience significant demand, even as revenue growth slows. As AI models continue to grow larger and smarter, there will be a constant need for more powerful GPUs.
There are risks, however, that could influence the stock's performance next year, including increased competition and the impact of slowing growth on the stock's valuation.
Competition is a growing concern, with Advanced Micro Devices (AMD) also reporting strong growth in its Instinct data center GPUs. AMD's data center segment posted year-over-year revenue growth of 122% in the last quarter, surpassing its competitor.
Despite AMD's progress, Nvidia still holds a significant edge in meeting demand, with its data center GPU business generating a revenue of $30.8 billion in the last quarter, far surpassing AMD's quarterly data center revenue of $3.5 billion.
A potential risk for Nvidia investors is the slowing growth and its effects on the stock's valuation. The stock currently trades at a P/E ratio of 54, which is consistent with its previous five-year trading history. Although this premium may be anchored by investor expectations of triple-digit growth rates, those days might be numbered.
Wall Street analysts anticipate a 50% growth in Nvidia's earnings in the next year, aligning with revenue development. If investors decide to lower the stock price to a 40 P/E ratio by this time next year, such as $177 based on the next year's earnings estimate, it implies potential growth of 28%. Even with this lower P/E ratio, the stock's premium over the average stock would remain substantial.
The possibility of a reduced P/E ratio as Nvidia's growth slows is why I wouldn't invest with the expectation of another year of exceptional returns. There's a strong chance the stock will deliver more moderate growth in 2025, so investors should only consider buying shares as part of a long-term investment strategy.
Understanding the financial implications, investors might choose to allocate some of their money into Nvidia's stock, given its predicted growth in the data center division.
However, it's essential to consider the potential impact of competition and changes in the stock's valuation when planning an investment strategy in Nvidia's stocks.
