Nvidia's AI profits justify its high valuation

Nvidia's latest results show that its AI hardware business is already generating enormous profits, with revenue up 106% year over year to $96.2 billion. The company's ability to convert those sales into cash—free cash flow reached $69.9 billion in the quarter—distinguishes it from many AI names that rely on future potential. The stock's valuation, at roughly 25 times fiscal 2027 earnings estimates, appears more reasonable when considering the forward multiple of about 15 times based on fiscal 2028 estimates. However, that attractiveness depends on whether Nvidia can deliver the growth Wall Street expects.

Looking ahead, Nvidia's expansion beyond GPUs into full computing systems, such as the Vera Rubin platform, is a key driver. The company estimates its revenue opportunity per gigawatt of AI infrastructure has grown from around $18 billion with Hopper GPUs to $40 billion with Vera Rubin. Yet, risks remain: Nvidia has warned that shortages of land and power could delay customer deployments, and its large financial commitments—$366 billion in future spending—increase downside exposure if demand slows. Additionally, cloud customers' strong growth (Azure up 43%, AWS up 37%, Google Cloud up 82%) suggests AI spending is helping them, but it does not yet prove those investments will generate sufficient long-term returns.

Overall, the author believes Nvidia's stock is not cheap on a risk-reward basis, but its price is much better supported by current earnings and cash flow than most AI stocks. The company's ability to maintain its growth trajectory while managing supply constraints and margin pressures will be crucial to sustaining investor confidence.