76report

March 12, 2025

NVIDIA (NVDA): The Time Has Come

• NVIDIA (NVDA) is now arguably the most important technology company in the world. Its Graphic Processing Units (GPUs) have become the foundation of the AI revolution.

• Market dislocation that is largely unrelated to NVDA’s long-term trajectory has sent the shares down 25% from recent all-time highs.

• While there are risks, NVDA is an exceptional company with the potential to grow earnings at high rates for many years to come.

• Now trading for approximately 20x next year’s earnings, the share price is too attractive to ignore.

• We have added NVDA to the American Resilience Model Portfolio.  

Once primarily a technology provider to the video game industry, NVIDIA (NVDA) has gone from relative obscurity to multi-trillion dollar valuation and household name.

Since we publicly launched just over a year ago, we have watched NVDA with admiration as revenue and operating profits in its core Data Center segment have simply exploded.

Data Center Revenue (Source: NVDA)

NVDA has become the dominant provider of Graphic Processing Units (GPUs). GPUs are specialized semiconductors that handle complex visual and mathematical calculations.

GPUs are basically the brains of supercomputers located in data centers all around the world. They provide the high-speed computing required for artificial intelligence.

While NVDA’s growth has been extremely impressive, we have so far hesitated to include the stock as a Model Portfolio holding, primarily because we have been cautious around valuation.

We also initially had some concerns about earnings sustainability, given the sudden surge.

Meanwhile, as we watched the NVDA story unfold, our conviction in the AI revolution has solidified. Our preference, however, has been to gain AI-related exposure through various other stocks, many of which we have described in the 76report (and continue to like).

Circumstances have changed

The recent pullback in NVDA shares is too great to ignore. NVDA is down 15% on a year to date basis and some 25% from peak levels just achieved in January 2025.

NVDA shares had advanced sharply in recent months in response to strong (perhaps overly strong) market enthusiasm towards the AI theme. Much of this momentum was connected to Trump’s commitment to provide policy support for the AI buildout.

NVDA shares came very close to surpassing their all-time high reached just a few weeks earlier following Trump’s $500 billion Stargate announcement on January 21 (which we discussed here).

Several things then happened to break this momentum.

Within a week of the Stargate announcement, Chinese AI start-up DeepSeek took over the headlines. Market sentiment towards AI went from euphoria to panic.

As we described here at the time, investors were fearful that DeepSeek had achieved an efficiency breakthrough that meant AI computing capability could be created at much lower cost than previously anticipated.

The implication was that stocks like NVDA and other AI plays would see less demand going forward.

But in the weeks that followed, as we anticipated, AI stocks began to recover. Investors gradually came to realize that there would likely be no interruption to the aggressive capital spending plans of the big tech platforms.

These companies told the market they would continue to invest hundreds of billions into their AI capacity, in some cases increasing their commitments.

There also appeared to be growing acceptance of the idea that efficiency breakthroughs in AI should actually help long-term demand. The more affordable AI becomes, the more widely and rapidly it will be adopted.

Thought leaders like Microsoft (MSFT) CEO Satya Nadella started talking about Jevon’s Paradox—the phenomenon in economics where increased efficiency in the use of a resource (such as GPUs) leads to increased, rather than decreased, consumption.

By late February, NVDA shares had nearly returned to their highest levels, touching $140. But broader market momentum once again reversed, and NVDA shares started to slide.

Investor focus then turned towards NVDA’s fourth quarter earnings report on February 26, 2025.

The financial results actually appeared to come in at or above expectations—leading to an initial pop in after-market trading after they were released.

As we described at the time, the company’s comments and outlook were also encouraging.

But in the days that followed, NVDA shares drifted downward again as tech stocks as a whole were driving the market lower.

The tech sell-off

Tech stocks have continued to be the worst performers in recent weeks as market sentiment has deteriorated.

The chatter among investors relates primarily to concerns about economic disruption from Trump’s tariff policies, the implications of reduced federal spending, and a potential slowdown (and even possibly a recession).

Interestingly, tech companies are not necessarily the most vulnerable to a slowing economy or tariffs that impact industrial supply chains.

Yet high valuations and heavy concentration within major indices have led to the tech sector bearing the brunt of recent selling. We have seen a rotation away from technology shares and towards more defensive sectors and even foreign stocks.

The crypto sell-off (following the recent Bybit hack) and the struggles of Tesla (TSLA) (with Elon Musk falling out of favor with many of his prior customers) have only exacerbated negative sentiment in tech.

This negative momentum has continued through most of March.

As we write on March 12, 2025, the Nasdaq Composite is down approximately 8.5% year to date, although both the Nasdaq and NVDA shares are responding positively to today’s CPI report.

The latest CPI report offers some reassurance that inflation is moderating. This development favors lower interest rates going forward.

Yet even with today’s bounce (up approximately 5%), NVDA shares remain way down from recent highs.

Price is everything

Every viable business is worth something. The key to investing is understanding what is a good price to pay for a business relative to its prospects.

An excellent company with a lot of future growth could turn out to be a disappointing investment, simply because one overpays for it.

In the case of NVDA, there has been a substantial reduction in its market valuation without a corresponding decline in its business prospects, which remain quite strong.

At current levels, NVDA shares are trading at approximately 25 times consensus estimate earnings per share for this year (fiscal year ending January 2026). The P/E multiple drops to approximately 20 times for the following year.

NVDA’s meteoric rise in recent years has been driven by real earnings growth—not hype.

Current P/E multiples for NVDA reflect only a modest premium to the broader market. The S&P 500 Index now trades at approximately 21 times and 19 times this year and next year’s earnings.

Open-ended upside

It is not an exaggeration to say that NVDA is driving the AI revolution, which is still in early stages. NVDA technology continues to be in extremely high demand with few competitors able to match its performance.

As CEO Jensen Huang has pointed out, NVDA customers choose its products because the total economic benefit far surpasses that offered by the competition, who cannot compensate for this even with lower prices.

They call it “total cost of operations.” Our TCO is so good that even when the competitor's chips are free it's not cheap enough and that that is our goal to add so much value that the alternative is not about cost. - NVIDIA Founder and CEO Jensen Huang (3/7/2024)

Jensen Huang’s long-term vision is that we are in the very early innings of a multi-trillion dollar technology replacement cycle.

The Central Processing Units (CPUs), which power personal computers, are being supplanted by Graphic Processing Units (GPUs), which reside in data centers.

Computing is shifting to the cloud, where it can be performed at extremely high speed by supercomputers. This is a structural growth trend that may persist for decades—with NVDA chips at the very center of the whole dynamic.

NVDA is a relatively volatile stock—and there are certainly long-term business risks—from the possibility of some margin compression to the current reliance on Taiwanese manufacturing facilities.

Further market volatility and negative tech sentiment could conceivably send NVDA shares even lower. Investors should be prepared.

But the current share price, in our view, is too low for a business with such superb positioning in what could be described as the most important technology trend (AI) as well as such elevated long-term growth prospects.

We have therefore decided to take advantage of current market dynamics and add NVDA to the American Resilience Model Portfolio as a long-term growth investment.

NVIDIA (NVDA)

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