NVIDIA‘S (NVDA 4.55%) Evolving from a niche gaming hardware company to a $3.18 trillion technology giant is a great example of the potential that comes with long-term investing. A $1,000 investment a decade ago is now worth $270,790. However, as this stock’s sustained rally (largely driven by the artificial intelligence (AI) trend) has become long in the tooth, investors should keep a closer eye on its results for clues about what the next few years might bring.

With each passing quarter, more investors are asking themselves: Is Nvidia stock still a buy, or is it time to take profits before a disappointing earnings report bursts a potential price bubble?

Let’s dig deeper.

It will Heavy to impress the market

During earnings season, retail investors are often confused when their stocks fall despite rising sales and profits. Price fluctuations are usually more related to Stock valuations tied to forecast Future Performance, not current performance. So if a company doesn’t consistently beat expectations, its stocks can fall even after what are otherwise considered good financial results. This could become a major challenge for Nvidia as it tries to beat the already spectacular results of previous years.

In the second quarter of fiscal 2024 (which is primarily associated with the calendar year 2023), Nvidia’s revenue grew 101% year over year to $13.51 billion. That figure pales in comparison to analysts’ expectations of $28.7 billion in revenue in the second quarter of fiscal 2025. Meeting or exceeding those lofty market expectations will be key for Nvidia to maintain its valuation of 40 times year over year revenue. S&P500 Average of just under 3.

Can margins stay this high?

One reason for this Nvidia can justify such a high sales valuation by Gross marginswhich compares the selling prices of its products with the direct production costs. Last quarter, that number was a staggering 78.4%, powered by industry-leading AI Graphics processors (GPUs) like the h100, which sells for about $25,000 each. For context: Microsoft has a lower gross margin of 70%, even though the company primarily sells digital software-as-a-service rather than physical products.

Nvidia could take advantage of the chip shortage and its competitive advantages, such as its GPU-associated software platform CUDA (which programmers are more familiar with) to take advantage of consumers. And investors should keep a close eye on gross margins in the second quarter and beyond.

Image source: Getty Images.

Until now, competition from competitors such as Advanced micro devices has not led to any significant margin pressure. But Nvidia’s top supplier Semiconductor manufacturing in Taiwan has brought up the idea of ​​raising its production prices to get a bigger piece of the pie. Capitalism tends to erode excess margins, and Nvidia’s windfall probably won’t last forever.

Watch for signs of economic slow

Earlier this month, higher than expected unemployment figures set off alarm bells on Wall Street. And according to analysts at JPMorgan Chase & Co.the probability of a recession in the US before the end of the year is 35%. Investors should look for signs of these trends in Nvidia’s earnings.

Nvidia will be sensitive to changes in macroeconomic sentiment, as its high-end AI GPUs are arguably “luxury” technology products that are not essential to the core business of many of its customers. large language models (LL.M.) are generally not profitable and are therefore likely to be among the first study segments to be canceled in a weakening economy.

Although AI could become one of the most transformative tech megatrends of recent years, bears an uncanny resemblance to the dot-com bubble in the early 2000s. The industry could quickly fall apart if companies decide it is no longer worth investing So much for a largely unproven opportunity.

Is Nvidia stock a buy?

Looking at the results of the last two years, it’s usually not a good idea to bet against Nvidia. The chipmaker has proven its critics wrong time and time again with incredible results quarter after quarter. And the second quarter of fiscal 2025 might be no exception.

However, investors should also be aware that the risks of owning Nvidia are beginning to rise — possibly more than the potential rewards. The company will face increasingly challenging comparables as it tries to outperform its already fantastic earnings. And its unusually high margins could eventually come under pressure from suppliers and competitors. The increasing likelihood of a recession in the near future is probably the largest possible headwind. And it could be a good idea, take Profits before the macroeconomic environment changes.