Nvidia Stock Looks Cheap Right Now, but Here's 1 Reason It Could Actually Be Expensive

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Bram Berkowitz, The Motley Fool

Tue, Mar 25, 2025, 1:45 AM 4 min read

The artificial quality (AI) behemoth Nvidia (NASDAQ: NVDA) has gotten disconnected to a rocky commencement this year, with shares down astir 9% (as of March 24) truthful acold successful 2025. The emergence of the Chinese AI chatbot DeepSeek, concerns astir economical growth, and President Donald Trump's projected tariffs person led investors to reconsider the fashionable AI trade.

But arsenic astir semipermanent investors know, sell-offs are often opportunities to bargain shares of large companies astatine much charismatic valuations, particularly if the company's fundamentals are inactive intact. Many would reason that this is the lawsuit for Nvidia, with Wall Street adjacent a statement bargain connected the stock.

However, portion Nvidia banal whitethorn successful information beryllium cheaper close now, there's 1 crushed it really could beryllium expensive.

A large portion of the Nvidia communicative implicit the years and successful the contiguous is the company's unthinkable margins. Gross borderline is calculated by taking revenue, subtracting the outgo to marque the goods sold, and past dividing this fig by revenue. While gross borderline doesn't relationship for each expenses astatine a company, it looks astatine the wealth retained aft the costs to marque a product. A precocious gross borderline besides indicates ratio and pricing powerfulness due to the fact that it suggests a institution has the powerfulness to acceptable a precocious outgo comparative to the outgo of the good. That implies determination is an inelastic demand.

NVDA Gross Profit Margin (Quarterly) Chart

As you tin see, Nvidia's gross borderline has contracted successful caller quarters. In the company's fiscal 2025 4th fourth (ended Jan. 26, 2025), the gross borderline fell to conscionable implicit 73%. That's inactive an unthinkable gross borderline and net inactive accrued from the 3rd quarter. But it besides means that the summation successful the outgo to marque Nvidia's chips and different AI infrastructure didn't construe into arsenic overmuch gross growth. For instance, successful the company's 3rd quarter, the outgo of gross grew 20% from the anterior 4th and gross grew 17%. But successful the 4th quarter, the outgo of gross roseate 19%, portion gross lone grew 12% 4th implicit quarter.

This mightiness pb investors to judge that pricing powerfulness is eroding and determination is much contention than initially believed, particularly considering that Nvidia's borderline is truthful high. On Nvidia's fourth-quarter net call, CFO Colette Kress said that its gross borderline should stay successful the debased 70s arsenic the company's next-generation Blackwell chips ramp up, but determination volition beryllium an accidental to spot gross borderline rebound backmost into the mid-70s aboriginal successful fiscal twelvemonth 2026 (now underway).

Wall Street analysts look to beryllium giving the institution the payment of the doubt. Analysts connected mean expect the gross borderline to bottommost successful the existent 4th astatine 71.1%, according to information provided by Visible Alpha. They past expect the gross borderline to rebound to astir 74.5% by the extremity of fiscal twelvemonth 2026. Diluted net per stock are besides expected to turn by astir 48% successful fiscal 2026 connected a year-over-year basis.