Should You Invest in Nvidia After Its Blowout Second-Quarter Results? Here's the Good News and the Bad News.

On August 26, Nvidia reported its second quarter results for fiscal year 2027, which exceeded Wall Street's expectations. The chipmaker's stock price skyrocketed by nearly 9% the following day. Nvidia's stock appears to be a buy, but investors should remain cautious due to management's deals with major AI customers.

Nvidia specializes in graphics processing units (GPUs) for data centers, crucial for AI training and inference workloads. The company's new Vera Rubin systems, which incorporate Rubin GPUs, CPUs, and advanced networking components, offer up to 30 times more performance per megawatt than previous Blackwell Ultra systems. Vera Rubin systems will also cut inference token costs by 97% compared to Blackwell Ultra, potentially increasing demand for Nvidia's chips and making data center operations more profitable.

Wall Street had predicted Nvidia would generate $92.2 billion in revenue for its fiscal second quarter, but the company surpassed this figure by delivering $96.2 billion, a 106% increase from the previous year. Data center segment revenue accounted for $89 billion, growing at a 117% rate. Nvidia's adjusted earnings surged by 120% to $2.22 per share during the quarter, bringing its adjusted trailing 12-month earnings to $7.01 per share.

This valuation places Nvidia's stock at a P/E ratio of 34.9, significantly below its 10-year average of 61.5, suggesting potential undervaluation.

Investors should also note Wall Street's bullish outlook, with the company expecting at least 70% revenue growth in fiscal 2028. Nvidia's partnership with major AI players such as Microsoft, Amazon, and smaller AI labs presents both opportunities and risks. While these collaborations could fuel Nvidia's growth, ongoing exposure may become uncomfortable if the AI boom encounters hurdles.

Overall, Nvidia's attractive pricing, rapid growth, and leadership in AI hardware make it a compelling addition to a diversified portfolio, but investors must keep a close eye on the evolving circular financing landscape.