In recent years Nvidia (NASDAQ: NVDA) has been one of the most popular stocks, thanks to its astronomical growth. However, the stock fell after the chipmaker reported its fiscal second-quarter earnings last week, despite incredible growth that exceeded analyst expectations. The market was not impressed.
Let’s take a closer look at the company’s latest quarterly results and the one risk that seems to be weighing on investors’ minds.
The excellent sales growth continues
For the second fiscal quarter, Nvidia saw revenue increase 122% year over year to $30 billion. Adjusted earnings per share (EPS) came in at $0.68, an increase of 152%. Granted, that was a slowdown from 262% revenue growth and 461% adjusted earnings per share in the first quarter, but still incredible growth.
The data center business once again led the way with a 154% increase in revenue to $26.2 billion. The company attributed its growth to its Hopper graphics processing unit (GPU) computing platform and began ramping up its latest H200 Hopper chip in the quarter.
Gross margins fell sequentially as Nvidia scaled up its new Blackwell chips, but still remained a robust 75.1%. That was a decrease from 78.4% in the first quarter.
Nvidia is also generating a huge amount of cash, with operating cash flow of $14.5 billion in the quarter. Free cash flow was $13.5 billion.
It ended the quarter with net cash and marketable securities of $26.3 billion. It also announced a new $50 billion share buyback program.
Looking ahead, the company expected third-quarter revenue of $32.5 billion, led by Hopper’s growth and shipments of samples of the new Blackwell architecture. It called demand for Blackwell “incredible” and said the transition to the next generation architecture will be smooth, with demand for both Hopper and Blackwell chips expected to remain strong.
Nvidia noted that it did have to make a change at Blackwell to improve production yields, but that it expects production to increase in the fourth quarter. It was said that no functional changes were required. Last quarter it was indicated that production would increase in the third quarter. It now expects to recognize several billion dollars in Blackwell revenue in the fourth quarter. This is good news and allays fears that a longer delay could have occurred.
It predicted that the data center business would continue to grow strongly next year and beyond. It noted that the next generation of large language models (LLMs) would require ten to even forty times the computing power of the previous generation and that the need for more and more computing power would continue.
Is this the time to buy the shares?
Despite its spectacular growth, robust gross margins and opportunity, Nvidia trades at a relatively modest valuation, with a forward price-to-earnings (P/E) ratio of just 30 times analysts’ estimates for next year.
Given the need for ever-increasing computing power to train more complex AI models and the spending big tech companies are making to advance AI, Nvidia appears to have a long road of growth ahead of it. Combine that with a very reasonable valuation, and the stock looks like a buy.
The one major risk facing the stock and the question on many investors’ minds is whether all the spending on AI will result in a payout for the companies making that spending. Now companies with cloud computing segments are liking it Microsoft, AlphabetAnd Amazon see some benefits, and companies like this Metaplatforms And Apple are also investing heavily in AI.
However, these benefits will also have to trickle down to software companies that develop AI applications and to their customers. Right now, there’s a lot of money being spent on AI infrastructure on behalf of Nvidia, but there’s still an ongoing debate about whether other companies will see these investments pay off. If they don’t, spending on AI infrastructure could ultimately slow significantly.
So while Nvidia still looks like a buy, the one thing investors should really pay attention to is whether software company growth can start to increase thanks to AI. If these companies don’t see growth increase in the coming year, it could be the proverbial canary in the coal mine when it comes to Nvidia’s valuation.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Geoffrey Seiler has positions in Alphabet. The Motley Fool holds positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has one disclosure policy.
This risk is weighing on investors’ minds as Nvidia continues to see explosive growth. Is the stock still a buy? was originally published by The Motley Fool