Nvidia’s Extraordinary Growth and the Challenge of Sustaining Demanding Valuations Over Time

By Antonio Di Giacomo, Senior Market Analyst at XS.com

Nvidia has established itself as one of the most extraordinary growth companies in the global technology sector. Over the past two fiscal years, its revenues have risen from levels close to $60 billion annually to well above $120 billion, driven by the explosive demand for chips used in artificial intelligence, data centers, and accelerated computing, transforming its financial profile in an exceptionally short period.

This progress is reflected not only in sales but also in profitability. Nvidia has reported gross margins above 70% and operating margins close to 60%, figures far exceeding the semiconductor industry average, which typically ranges between 20% and 30%. In terms of returns, ROE remains above 70%, and ROA exceeds 35%, metrics more typical of software companies than hardware manufacturers.

This performance has led to a sharp revaluation in the stock market. The shares have gained several hundred percent over three years, pushing the market capitalization above $3 trillion. As a result, valuation multiples have expanded
significantly, with a P/E ratio remaining above 40 times forward earnings, compared with a sector average of around 20 times.

The PEG multiple also reflects demanding expectations. In many scenarios, it exceeds 1.5, suggesting the market is pricing in earnings growth of 30%-40% annually for several consecutive years. This leaves little room for error, as any slowdown could trigger abrupt valuation adjustments.

The dispersion among valuation models is notable. Depending on whether annual revenue growth of 20%, 25%, or 30% is assumed over a five-year horizon, fair value estimates can differ by hundreds of billions of dollars. This wide range reflects uncertainty over how long the current artificial intelligence expansion cycle can be sustained.

From a strategic perspective, Nvidia remains a central player in the transition toward accelerated computing. It is estimated to control more than 80% of the AI accelerator market in data centers, allowing it to capture a disproportionate share of global AI infrastructure spending and reinforcing its pricing power and elevated margins.
Nevertheless, the risk profile is high. The stock’s historical volatility exceeds the broader market average, with double-digit quarterly moves following earnings releases or shifts in macroeconomic expectations. In addition, reliance on advanced manufacturing processes limits operational flexibility and exposes the company to potential supply chain bottlenecks.

This is compounded by increasingly intense competition. Direct rivals are seeking to gain market share with alternative solutions, while large technology companies are developing specialized in-house chips, which could reduce Nvidia ’s marginal growth as the artificial intelligence market moves toward a more mature phase.

In conclusion, Nvidia offers an exceptional combination of growth, profitability, and technological leadership, supported by figures that few companies in the sector can match. However, the current valuation requires the company to sustain very high growth rates for several years. The true challenge is not finding leadership, but maintaining it over time, as any deviation from the expectations priced into the market could lead to a significant share price correction.