MW Is Nvidia's bubble bursting? The stock is cheap - if you can stomach this one risk.

By Laila Maidan

Nvidia's fundamentals look good even as the stock gets pounded, but investors who want to maintain exposure need to watch its Big Tech customers' spending trends

Nvidia Corp.'s stock continues to get slammed, with a 13.7% weekly decline putting it on pace for its worst such drop since January. That was when DeepSeek made investors question whether massive spending on artificial intelligence was sustainable.

The onetime stock-market darling hasn't been able to catch a break at all this year, and it's down 35.9% from its peak close, achieved in early January. The selling escalated this week as the sweeping tariffs announced by President Donald Trump on Wednesday sparked renewed fears of a global economic slowdown, leading investors to continue to dump risky tech stocks.

See also: Nvidia's stock gets a rare downgrade, as there are bigger problems than tariffs

The group of megacap tech stocks known as the Magnificent Seven collectively lost $1.03 trillion in market capitalization on Thursday in what was the largest one-day market-cap decline on record for the grouping, according to Dow Jones Market Data.

Investors who traded through the dot-com bust are having flashbacks, and the hype around Nvidia $(NVDA)$ has some questioning whether the chip maker is just another Cisco Systems Inc. $(CSCO)$.

Is Nvidia the next Cisco?

As the main hardware provider for the AI boom, Nvidia is often compared to Cisco, the internet's hardware provider. Both companies experienced tremendous growth. Cisco's stock ran up by over 3,750% before plunging, and two decades later, it hasn't recovered. Some fear Nvidia's fate could be similar, but the chip giant's fundamentals appear to be on a more solid footing.

Below are two charts from Research Affiliates. The first chart shows Nvidia's price being driven by a high price-to-earnings multiple (in blue), which peaked at 194.6, while growth in earnings per share (in yellow) was still negative. Simply put, investors were willing to pay a hefty price of about $195 for every $1 the company earned, as they expected revenue to pick up. Those expectations eventually paid off as revenue soared and earnings began to drive a larger percentage of the share price, compressing the P/E ratio.

In contrast, the chart below shows how Cisco's price was dominantly driven by a high P/E ratio rather than by earnings per share, even as EPS rose.

The same dynamic is true for the remainder of Big Tech, with the top 10 stocks accounting for 28.8% of total market earnings by the end of 2024. In 2000, the top names only made up 16.1% of total earnings, according to Research Affiliates. In other words, the devil is in the details - or in this case, the data.

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Nvidia (NVDA) is expected to continue its positive trend, with sales estimated to grow by 57% into January 2026, according to FactSet. Its forward P/E estimate for January 2026 is expected to compress to 22, while EPS is projected to rise to $4.53 from $2.94 a year earlier, according to FactSet. Morningstar's fair-value estimate for the stock, which takes into account fundamentals, uncertainty and quantitative factors, is set at $130, which means the stock is cheap on a price basis. It's trading near $96 on Friday.

But the outlook could change if revenues get hit. The maker of graphics processing units must navigate an environment with deep uncertainties. Investors are on standby for further clarity on tariffs for chip makers and on countertariffs that other countries may impose. The Trump administration excluded chips from its latest round of tariffs as it works on specific policies and tariffs for the sector, but semiconductors are still a part of finished goods like personal computers and servers that are subject to tariffs already in place.

The company's reliance on big spending from data centers will be in question once there's further clarity. Big tech companies expanding their AI capabilities have fixed capital expenditures for infrastructure and may cut that spending back to the amount equal to the cost of tariffs, said Gil Luria, head of technology research at D.A. Davidson.

Luria added that the large spending budgets put out by Microsoft Corp. $(MSFT)$, Meta Platforms Inc. $(META)$, Alphabet Inc. $(GOOG)$ $(GOOGL)$ and Amazon.com Inc. $(AMZN)$ were done ahead of demand and at a time when business was booming. That level of spending may not be matched in a weaker economy.

Investors with exposure to Nvidia will need to pay attention in the next round of earnings calls to see if the company's customers plan to cut back on their data-center buildouts.

-Laila Maidan

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April 04, 2025 11:41 ET (15:41 GMT)

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