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No investor, whether they want to or not, can really afford to ignore microchip giant Nvidia. While it may have shrunk a little of late, the world’s largest company remains so big that, as of 31 October 2025, it accounted for around 6% of the global MSCI World index all on its own.
This means nearly anyone with broad global exposure to the markets will likely have some stake in Nvidia’s future performance.
Its stratospheric rise coincided with the launch of OpenAI’s ChatGPT in November 2022. To put this in share price terms, in the three years leading up to that AI milestone the shares gained 212%. An impressive showing by any standard – but paling into insignificance when you consider that in the three years since they have gone up nearly 10-fold.
Yet, after reaching a valuation of more than $5 trillion for the first time, there are now growing signs of investor caution around the stock as competitive threats start to build. This article will look to cut through the noise and understand Nvidia’s strategy, market positioning and valuation.
What is behind Nvidia’s surge to prominence?
To understand why the company has been such a winner in the artificial intelligence space, we must take a step back and look at its history.
Nvidia’s premium processors were initially used for graphics-heavy computer games, striking key licensing deals to place its chips in consoles like the Xbox and PlayStation. But the ability of Nvidia’s GPUs, or graphics processing units, to accelerate the speed of data processing have helped to put it at the forefront of the AI revolution.
Under CEO Jensen Huang the company has built on this head start and is now the market leader by a considerable distance – most estimates put its share at around 90%.
Its latest iteration of AI chip – Blackwell – launched in late 2024 and has been the subject of relentless demand, supporting extremely high margins and bumper cash generation.
Nvidia has stated that it expects demand for next generation chips to outstrip supply in 2025 and possibly through 2026, leading to a big backlog of orders. This constraint is beyond its control and due to the highly complex supply chain.
Gross margins, or how much of its revenue is left if you subtract the costs of producing its chips, stand at more than 70% and the net margin, encompassing other operating costs, interest and taxes, is more than 50%.
What about regulatory and competitive threats?
Typically, when a company is as profitable as Nvidia either regulators intervene or competition emerges to get a slice of the action.
There have been hints of regulatory pushback from the authorities with an antitrust investigation launched in the US in 2024 and China commencing its own probe in September 2025.
External competition has been limited until relatively recently. However, the rave reviews for Google-owner Alphabet’s new Gemini 3 model and the company’s push on its custom TPU (tensor processing unit) AI chips, with reports Meta Platforms might be in talks over a multi-billion-dollar deal to use them, have shaken investors in Nvidia.
As the chart above demonstrates this has seen a divergence between stocks like Nvidia which are connected to OpenAI and its ChatGPT model and those like Broadcom with a stake in Alphabet’s own play in the artificial intelligence space.
Set against that, Nvidia is evolving into a broader platform rather than just being a hardware provider. Its CUDA software ecosystem and new ‘Nvidia Inference Microservices’ (NIMs) create high switching costs and could help protect its competitive position. It’s also the case that, for now, there’s plenty of demand to go around. If that were to change then the concerns about competition might carry increased weight.
What has recent performance been like?
Third-quarter numbers were impressive at the headline level. Amid strong demand for the company’s Blackwell chips, Nvidia’s revenue was up 62% year-on-year to $57 billion in the three months to the end of October – ahead of the $55 billion consensus estimate.
Net income was up 65% year-on-year to $31.9 billion, ahead of the forecast $30 billion. Data centre revenue – which essentially encompasses Nvidia’s sales of AI chips – was up 66% at $51.2 billion versus the $49 billion which had been pencilled in.
Sales forecasts for the fourth quarter also came in higher than anticipated with guidance of $65 billion materially higher than the $61.7 billion which analysts were expecting.
While the data centre arm is obviously the main story, other parts of the business also contributed. Revenue from its gaming business was up 30% to $4.3 billion, professional visualisation revenue, derived from supporting activities like video editing, 3D rendering and virtual reality, was up 56% to $760 million and its automotive and robotics operations saw revenues up 32% to $592 million.
Potential warning signs
As is often the case with a set of corporate results, the devil was in the detail and there were some items buried within the statement which might ring a few alarm bells.
Inventory and receivables are growing faster than sales on a year-on-year basis, which is a possible warning sign. Receivables relate to revenue which has potentially been booked by Nvidia but where payment has not yet been received.
Some analysts argue this is simply a consequence of having some extremely large customers, including the so-called hyperscaler cloud computing providers like Amazon and Microsoft, who have the buying power to negotiate longer payment terms.
Nvidia has also flagged that ‘less capitalised’ companies could face difficulties securing financing for large-scale infrastructure projects. Accessing adequate power to run big data centres is also a big challenge, any setbacks in these areas could have a knock-on effect on demand for Nvidia’s chips.
The company has been investing in some of its customers – most notably with a commitment to put $100 billion into OpenAI. This has been characterised as ‘vendor financing’ in some quarters and has raised hackles among investors with long enough memories.
In the late 1990s Cisco and other internet equipment giants engaged heavily in what became characterised as vendor financing. These arrangements helped boost demand in the near term but exacerbated the crash that followed.
Does Nvidia trade on a lofty valuation?
The obvious implication of Nvidia’s unprecedented market value, $4.3 trillion at the last count, is that the shares must trade at a sky-high valuation.
Actually, its price to earnings or PE ratio based on consensus forecast earnings per share for the next financial year (which ends in January 2027) is 24 times. This is significantly lower than many other businesses which have links to the AI theme.
The price to earnings growth ratio (calculated by dividing the PE by forecast earnings growth) is 0.4 times – anything under one is usually considered as representing value.
These metrics do reflect some demanding growth assumptions, so, in making a judgement on the valuation, you must consider if these assumptions are valid.
Morningstar chief investment and research officer Dan Kemp says: ‘There are two most likely outcomes on AI; either we’ll find we’ve been underestimating the commercial demand for it and people’s willingness to pay for AI models or we’ll find out that AI companies and providers have over committed to investing.”
Nvidia’s fortunes are likely to hinge on which of these outcomes emerges over the medium term. For their part, analysts remain confident in the story with LSEG data suggesting 23 have it as a ‘strong buy’, 35 as a ‘buy’, six as a ‘hold’ and just one as a ‘sell’.
Tom Sieber: Content Editor
Tom Sieber is AJ Bell's Content Editor. He was previously the Editor of Shares Magazine. He has been with the business since 2012.
Tom is a regular contributor to the AJ Bell Money & Markets...
