This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Nvidia (NASDAQ: NVDA) stock has cooled off recently. After hitting a 52-week high of $212.19 in late October, shares closed out last week at $175.02 -- a decline of about 17%. This comes as sentiment around AI (artificial intelligence) has become less forgiving as investors demand clearer returns on the spending and look for evidence that the current AI boom can keep chugging along for the foreseeable future.
Nvidia, which sells the market-leading graphics processing units (GPUs) that power the data centers used to train and run AI models, has been a major beneficiary of the AI boom. But this also means that the stock could suffer if demand for AI computing slows.
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However, despite sentiment toward AI turning more negative recently, demand for AI chips remains extremely robust. So, is the stock's recent sell-off a buying opportunity?
Demand is still rising
A glance at Nvidia's fiscal third-quarter results certainly doesn't indicate that the AI boom is cooling off.
"Blackwell sales are off the charts, and cloud GPUs are sold out," Nvidia CEO Jensen Huang said in the company's fiscal third-quarter earnings release.
The tech company's fiscal third-quarter revenue rose 62% year over year to $57.0 billion. That was faster than the 56% year-over-year increase Nvidia reported in fiscal Q2. This marked a return to accelerating growth after fiscal Q2's top-line growth rate decelerated.
The data center segment, where most AI hardware demand sits, told a similarly bullish story in fiscal Q3. The segment's revenue grew 66% year over year in the third quarter to $51.2 billion -- up from 56% growth in the prior quarter.
Further, Nvidia's profitability continued to impress. Fiscal third-quarter operating income rose 65% year over year to $36.0 billion, and earnings per share climbed 67% to $1.30.
Looking ahead, Nvidia guided for fourth-quarter fiscal 2026 revenue of $65.0 billion, plus or minus 2%. At the midpoint, that implies about 14% sequential growth and roughly 65% year-over-year growth.
A great business, but a risky stock
For investors looking to get in on this growth story, the pullback in the stock price certainly helps. But the setback may not be significant enough to fully price in some of the stock's biggest risks.
Shares currently trade at about 43 times earnings. A valuation multiple like this makes sense if Nvidia can sustain its rapid growth and maintain its high gross margin in the 70s. But if investors start to see signs that either of these important factors behind Nvidia's valuation is at risk, the stock could take an even bigger hit.
The risk is not that Nvidia suddenly stumbles in execution. This is unlikely. The bigger risk is that the AI buildout takes a breather. After all, the semiconductor industry has been cyclical for years -- and it's unlikely that this will ever change.
Competition is also intensifying. Some customers, including deep-pocketed tech giants Alphabet and Amazon, are designing their own chips. If they come up with reasonable alternatives to Nvidia's GPUs, investors could get spooked.
And export rules remain another wild card. Nvidia has shown it can grow rapidly while even when China's demand fades in importance. But because of regulatory and geopolitical concerns about sales of AI chips to China, there's ultimately less visibility about Nvidia's potential in the important market than there is in the U.S.
Sure, the stock's pullback makes Nvidia shares more interesting than they were a few months ago. And it's difficult to critique the business; not only did Nvidia's sales accelerate in Q3, but management guided for a massive fourth quarter.
Even so, the stock's high valuation means investors likely won't be very forgiving if the AI boom shows signs of slowing. To be clear, there's no clear evidence it is fizzling out yet. But since the market is forward-looking, all it will take is one or two material signs of a cooling market for AI chips to send the stock sharply lower. While there's no guarantee this happens, it is a risk that demands a margin of safety when buying the stock -- and I do not believe the stock's margin of safety at the moment is sufficient.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
