Nvidia Stock Looks Cheap Right Now, but Here's 1 Reason It Could Actually Be Expensive

Core Viewpoint - Nvidia has experienced a decline in stock price due to emerging competition, economic concerns, and proposed tariffs, prompting investors to reassess the AI investment landscape [1][2]. Financial Performance - Nvidia's gross margin has contracted, falling to just over 73% in Q4 of fiscal 2025, indicating that rising production costs are not translating into proportional revenue growth [4][5]. - In Q3, the cost of revenue increased by 20% while revenue grew by 17%, and in Q4, the cost of revenue rose by 19% with only a 12% revenue growth [4]. - Analysts expect the gross margin to bottom at 71.1% in the current quarter but rebound to nearly 74.5% by the end of fiscal 2026, with diluted earnings per share projected to grow by nearly 48% year-over-year in fiscal 2026 [6]. Market Valuation - Nvidia currently trades at slightly under 26 times forward earnings, a significant decrease from previous valuations of around 50 times [7]. - If Nvidia's margins continue to contract, the company may be over-earning, which could lead to an increase in its price-to-earnings (P/E) ratio if market capitalization remains stable [7][8].