Key Points
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Nvidia fiscal fourth-quarter revenue surged 73% year over year.
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The company’s CEO recently highlighted a $1 trillion revenue forecast extending through 2027.
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The market’s cautious approach to cyclical hardware businesses may explain the stock’s recent underperformance.
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Over the last six months, shares of artificial intelligence (AI) semiconductor designer Nvidia (NASDAQ: NVDA) have gone nowhere. In fact, as of this writing, the stock is actually down slightly over that time frame.
For investors casually watching the headlines, this stock performance might seem entirely disconnected from reality. After all, the business continues to fire on all cylinders, posting exceptional top-line growth and signaling sustained demand from the world’s largest technology enterprises.
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So what will it take for shares to go higher? The issue requires looking beyond current momentum and understanding how the market prices hardware businesses amid a historic spending boom.
Image source: Getty Images.
A historic growth cycle
For now, Nvidia’s business looks unstoppable. In the company’s fourth quarter of fiscal 2026 (a period that ended on Jan. 25, 2026), revenue surged 73% year over year to $68.1 billion. This performance was driven by the company’s data center segment, which saw sales jump 75% to $62.3 billion.
Profitability was equally staggering. The chipmaker’s earnings per share climbed to $1.76, up from just $0.89 in the year-ago quarter. And the company’s cash generation was robust enough to support returning an impressive $41.1 billion to shareholders through share repurchases and dividends (primarily share repurchases) during the full fiscal year.
“Computing demand is growing exponentially,” explained Nvidia founder and CEO Jensen Huang in the company’s fiscal fourth-quarter earnings release. He added that customers “are racing to invest in AI compute” to power their future growth.
And the momentum is not expected to stop anytime soon. For its first quarter of fiscal 2027, management guided for revenue to reach approximately $78.0 billion — a significant sequential increase. But perhaps the most striking data point came recently during the company’s GTC event last week. Huang said he now sees at least $1 trillion in revenue from 2025 through 2027. With a figure that large, demand visibility is unusually strong right now.
The valuation burden
Yet despite this tremendous execution, the stock has struggled to gain ground recently. One reason for this disconnect is the stock’s valuation. Trading at a price-to-earnings ratio of about 36 as of this writing, Nvidia shares are priced for near-flawless execution.
A multiple like this demands that the company not only keep converting strong demand into growing revenue, but also maintain its extraordinary profitability while doing so. In the fiscal fourth quarter, Nvidia reported a non-GAAP (adjusted) gross margin of 75.2%. While that is an impressive figure, maintaining margins at that level becomes increasingly difficult as the overall AI hardware market matures and customers push back on costs.
Indeed, deep-pocketed technology giants are actively developing their own custom silicon to reduce their reliance on Nvidia’s expensive hardware. Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL) offers its own tensor processing units (TPUs) to cloud customers, while Amazon (NASDAQ: AMZN) continues to scale its Trainium chips. And even Arm (NASDAQ: ARM), which traditionally licenses technology to other chipmakers, announced this week that it’s building its own AI chip in partnership with the deep-pocketed social media giant, Meta Platforms (NASDAQ: META). As these in-house alternatives mature and gain market share, they pose a real risk to Nvidia’s pricing power.
What it will take
So, what will it take for Nvidia stock to break out of its six-month slump and push higher?
The answer isn’t simple. While some investors may conclude that the company’s blistering growth, combined with its amazing guidance and its $1 trillion sales outlook, should almost guarantee that the stock rises, investors have to keep in mind that the market is a forward-looking mechanism.
To prove my point, just look at Micron Technology‘s (NASDAQ: MU) forward price-to-earnings ratio of just 8 as of this writing. In other words, despite the company guiding for extraordinary growth as the memory required to fuel the AI boom remains supply constrained, investors are already pricing in a cyclical peak.
With competition intensifying for Nvidia, some investors may be worried that the company’s sales will eventually slow — even if it doesn’t happen this year — and its margins will erode over time.
Ultimately, for the growth stock to rise, I believe Nvidia will need to prove that its high-margin software and networking platforms can lock in customers tightly enough to insulate the business from traditional hardware cycles. Alternatively, a catalyst that could lift the stock is the AI boom turning out to be bigger and lasting longer than expected.
Until the market feels confident that the current AI build-out will not end in a severe downcycle, I think the stock could remain stuck in neutral.
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Daniel Sparks and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms, Micron Technology, and Nvidia. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
