Analysis
A trillion-dollar bet: Can Nvidia keep justifying its sky-high valuation?
Investors demand near-perfect execution as Nvidia trades at a steep earnings multiple.
On Wednesday night, investors worldwide held their breath ahead of Nvidia's financial report for the fourth quarter of 2025. The results were a pleasant surprise—but not an unexpected one. Despite the strong numbers, Nvidia's stock fell 5% over the two trading days following the report.
As a member of the "Fantastic Seven" club alongside Apple, Alphabet (Google), Microsoft, Meta (Facebook), Amazon, and Tesla, Nvidia has long surpassed the status of a "large and significant company." It has become synonymous with the artificial intelligence revolution, making its financial reports a key indicator of the evolving AI landscape.
1. A 'boring' report card
Nvidia's actual results exceeded both analyst expectations and management's forecasts. In the fourth quarter, the company reported revenue of $39.3 billion, 2.9% higher than the average analyst estimate and 4.8% above management's forecast. Earnings per share (EPS) reached $0.89, 4.7% higher than the expected $0.85 per share.
Despite these strong numbers, investors reacted with indifference, and Nvidia's stock dropped 1.5% in after-hours trading. The reason? Beating estimates has become routine for Nvidia. In the previous quarter, EPS exceeded expectations by 6 cents, and the quarter before that by 4 cents. Nvidia consistently underestimates its own performance, or perhaps analysts are the ones failing to keep up.
Either way, Nvidia is like the student who gets a perfect score on every test—impressive, but no longer surprising.
2. A red flag in the report
By all measures, Nvidia delivered a strong report. In 2025, revenue grew 114% to $130.5 billion, while net income more than doubled to $72.9 billion, compared to $29.8 billion the previous year. When both the top and bottom lines are growing at such a pace, it might seem nitpicky to look for concerns—but there is one.
In the fourth quarter, Nvidia’s gross profit margin stood at 73%, exactly as forecasted by management. However, for a company that regularly beats its own forecasts, meeting expectations can be seen as a warning sign. More importantly, this marks the third consecutive quarter of declining gross margins, down from a peak of 78.4% in the first quarter of 2024. Management expects this trend to continue, forecasting a gross margin of 70.6% for the first quarter of 2025.
3. Data center growth at the expense of gaming
According to Nvidia’s CFO, the erosion in gross margin is due to the company’s shift toward selling data center systems, which are more complex and costly. In the fourth quarter, revenue grew 12% compared to the previous quarter and 78% year-over-year.
A closer look at the numbers reveals an interesting trend: revenue from the data center segment grew 16% quarter-over-quarter, while revenue from gaming shrank by 22%. The data center segment, which now accounts for 90% of Nvidia’s revenue, is benefiting from high demand for AI-focused computing platforms used in large language models (LLMs), recommendation engines, and generative AI applications.
Meanwhile, the gaming segment, which contributes just 6% of total revenue, declined—not due to weak demand but because of supply constraints for Nvidia’s Blackwell and Ada processors.
4. Surging liquidity and financing income
While Nvidia’s core revenue comes from data centers and gaming, another income source is becoming increasingly significant: financing income. In the fourth quarter, Nvidia’s net financing income reached $450 million, nearly doubling from $231 million a year earlier. On an annual basis, net financing income rose to $1.5 billion from $0.6 billion the previous year.
This increase is directly tied to Nvidia’s growing liquidity. The company now holds $43.2 billion in cash, cash equivalents, and marketable investments—66% higher than its $26 billion balance a year ago. This is despite Nvidia distributing $800 million in dividends and repurchasing $33.7 billion worth of its own shares in the past year.
5. Free cash flow fuels stock buybacks
Nvidia can afford to buy back its shares and pay dividends while still increasing its cash reserves thanks to its robust free cash flow. In 2025, Nvidia generated $60.7 billion in free cash flow—2.2 times higher than the $26.9 billion it reported a year earlier.
Free cash flow represents operating cash flow minus capital expenditures. Despite tripling its investments in property and equipment to $3.2 billion, Nvidia’s capital spending remains insignificant compared to its operating cash flow of $64.1 billion.
However, in the fourth quarter, Nvidia’s operating cash flow declined by 6%, leading to an 8% drop in free cash flow. Management attributed this to high accounts receivable and increased inventory to support Blackwell processor sales. Nvidia reported $11 billion in fourth-quarter revenue from Blackwell-based products, the fastest-growing product launch in its history. While this growth is impressive, it requires higher inventory levels, which temporarily affects cash flow.
6. Employee growth and retention
As of today, Nvidia employs approximately 36,000 people, with 75% (27,100 employees) working in research and development and the remaining 25% (8,900 employees) in sales, marketing, and operations.
Nvidia's report also provides demographic data on its workforce: 78% of employees are male, 21% female, and 1% declined to state their gender. Additionally, 6% of Nvidia’s U.S. workforce identifies as Black or African American and Hispanic or Latino.
Over the past year, Nvidia’s workforce grew by 22%, adding 6,400 employees—41% of whom were referred by existing employees. The company also reported a historically low turnover rate of 2.5%, improving from 2.7% the previous year and 5.3% two years ago.
7. The challenge of high valuation
Nvidia’s current market capitalization stands at $3 trillion, with a stock price of $125. This reflects a price-to-earnings (P/E) ratio of 43 based on last year’s earnings—a high multiple by traditional standards.
However, Nvidia’s growth rate is also unusually high. Analysts forecast that Nvidia will post earnings per share of $4.50 in 2026, a 53% increase from the previous year. This would bring its forward P/E ratio down to 28. Looking two years ahead, EPS is expected to reach $5.71, implying a further drop in the multiple to 22.
To justify these valuations, Nvidia must continue delivering extraordinary growth, with net profit expected to nearly double over the next two years. This is a significant challenge for management, especially in an increasingly competitive market where rivals are eager to claim a share of the AI chip boom that Nvidia currently dominates.
