The giant of artificial intelligence (AI) Nvidia (Nvda 3.16%)) experienced a difficult start this year, with actions of around 9% (from March 24) so far in 2025. The emergence of the Chinese AI Chatbot Deepseek, the concerns concerning economic growth and the prices proposed by President Donald Trump led investors to reconsider the Popular Trade of the AI.
But as most long -term investors know this, sales are often opportunities to buy actions from large companies from more attractive assessments, especially if the fundamentals of the company are still intact. Many would say that this is the case for Nvidia, with Wall Street near a purchase of stock consensus.
However, although the Nvidia stock can actually be cheaper at the moment, there is a reason why it could in fact cost expensive.
Contractual margins
A large part of Nvidia’s history over the years and in the present is the incredible margins of the company. The gross margin is calculated by taking income, by subtracting the cost of manufacturing goods, then dividing this number by income. Although the gross margin does not take into account all expenses in a company, it examines the money kept after the manufacturing costs of a product. A high gross margin also indicates the efficiency and the power of pricing because it suggests that a company has the power to set a high cost compared to the cost of the property. This implies that there is an inelastic demand.
Data by Ycharts.
As you can see, Nvidia’s raw margin has contracted in the latter quarters. During the fourth quarter of the company 2025 of the company (completed on January 26, 2025), the gross margin fell to just over 73%. It is always an incredible gross margin and the benefits have still increased compared to the third quarter. But that also means that the increase in the cost to make Nvidia tokens and other IA infrastructure has not resulted in so much income growth. For example, in the third quarter of the company, the cost of income increased by 20% compared to the previous quarter and income increased by 17%. But in the fourth quarter, the cost of income increased by 19%, while income increased only by 12% in the quarter.
This could lead investors to believe that the pricing power erodes and that there is more competition than we initially believe, especially given the fact that the margin of Nvidia is so high. When calling the results of the fourth quarter of Nvidia, CFO Colette Kress said that its gross margin should remain in the 1970s, while the new generation of the company of the company will increase, but there will be an opportunity to see the gross margin rebound in the mid -70s later in exercise 2026 (now in progress).
Wall Street analysts seem to offer the company the benefit of doubt. Analysts expect on average with the gross margin at the lowest during the current quarter at 71.1%, according to data provided by Visible Alpha. They then expect the gross margin to rebound at almost 74.5% by the end of the 2026 financial year. The profit diluted by Action should also increase by almost 48% during the year 2026 over one year on the other.
Is Nvidia exaggerated at the moment?
Nvidia is currently negotiating slightly less than 26 times the profits, which is much more attractive than when the action has been negotiated at around 50 times the profits or more a long time ago. However, if the management is incorrect and the margin of Nvidia continues to contract, then Nvidia could in fact get supplies at the moment and its price / profit ratio (P / E) would increase considerably if its market capitalization is taking place.
As already mentioned, analysts are currently projecting the gross margin will rebound this year and it could very well happen. This is something that investors should consider not only with Nvidia, but with all the stocks they cover. The P / E front ratio (which is based on estimates) is an excellent indicator of the place where a stock is located but it does not always tell the story. The real benefits of a company are of crucial importance and can have a significant impact on the P / E ratio. This will certainly be a big driver for the share of NVIDIA shares This year.
Bram Berkowitz Has no position in the actions mentioned. The Motley Fool has positions and recommends Nvidia. The Word’s madman has a Disclosure policy.