Could Nvidia Stock Crash in 2025? Here’s what the story says.

There are no guarantees when it comes to investing. This is the hard truth we all need to learn. Some investments carry low risk while others carry a high risk of failure, but none carry zero risk. When buying a stock, you should weigh its upside potential and monetary gain potential without ignoring its downsides.

Today many people are divided Nvidia (NVDA 4.43%). After soaring in recent years and becoming one of the largest companies in the world by market value, the bulls are fighting to keep the party going in 2025. The bears are calling for a crash in Nvidia shares and think they are overvalued. Even if both sides speak with certainty, it’s impossible to guarantee what will happen with Nvidia in 2025. While it’s possible for the stock to skyrocket or crash, how likely is it that either another scenario occur?

Using history as a guide, let’s try to determine the likelihood of an Nvidia stock market crash in 2025 and whether you should buy shares of the stock for your portfolio today.

Decades of history for a cyclical company

Nvidia is one of the best performing stocks in recent decades. Shares of the stock have grown 335,000% since their IPO in 1999, a compound annual growth rate (CAGR) of 30%. However, there have been several stock market crashes along the way. If we define a stock market crash as a decline of 50% or more, Nvidia has experienced four stock market crashes since its IPO: 2001, 2008, 2018 and most recently in 2022. Yes, just a few years ago Nvidia was hated by the investment community.

Why such erratic behavior on the part of investors? Well, for one thing, that’s how markets tend to work, even for the best companies in the world. Second, Nvidia operates in the cyclical semiconductor industry. A cyclical industry is one where customer demand in the end market is inconsistent, leading to volume fluctuations and income statement volatility. Semiconductors are cyclical due to inconsistent demand from computer chip buyers. You can see this in Nvidia’s revenue chart, which shows periodic dips and dips in revenue.

It’s been 26 years since Nvidia went public. The stock tanked in four of those years. So it’s certainly possible that Nvidia’s stock price will reverse and head south in 2025.

In fact, I think 2025 is a more likely year than most for stock price declines. Here’s why.

An increase in profit margin to be monitored with caution

When looking at a stock that is moving in a cyclical industry, we must try to analyze what part of the cycle we are in. For Nvidia, we are definitely in an uptrend cycle. Revenues are soaring thanks to new demand for artificial intelligence (AI). Perhaps more importantly, its operating margin is at an all-time high of 63%, showing that the company is implementing significant price increases due to what appears to be insatiable customer demand for its retail products. AI.

Eventually, Nvidia’s semiconductor supply will balance with customer demand. This will lead to price stabilization, slower revenue growth, and perhaps a turnaround in the semiconductor cycle (at least in Nvidia’s niche). This doesn’t mean it guarantees that Nvidia’s revenue will be profitable in 2025, but it’s not impossible. This has happened several times over the past 25 years, usually following periods of sharply rising incomes.

This is the nature of investing in a cyclical industry. Income may increase in the long term, but there will almost certainly be bumps along the way.

NVDA Operating Margin (TTM) Data by YCharts

Should you buy Nvidia stock?

At the current stock price, Nvidia has a market cap of $3.5 trillion. It has a price-to-earnings (P/E) ratio of 54, almost double the level of S&P500 Index average P/E of 30.

I think it’s likely that Nvidia’s revenue will grow over the long term, which should lead to earnings growth. But today the company has a record operating margin that will likely return to a lower level once the AI ​​boom stabilizes. If supply catches up with demand – as it always does in the case of semiconductors – then Nvidia’s sales prices and profit margins per chip are likely to decline. This is a double whammy for profits, due to lower revenues and lower profit margins.

Nvidia currently has a net margin of 55%, generating a profit of $63 billion on revenue of $113 billion. If revenues go through a down cycle in 2025 and fall to $100 billion but profit margins fall back to 40%, its net profit will fall to $40 billion. Compared to a market cap of $3.37 trillion, that’s a price-to-earnings ratio of 84. Nvidia’s stock is likely weaker in this scenario.

This is a great business, but one that trades with extremely high expectations and a chance of a cyclical downturn occurring in the near future. Avoid buying Nvidia stock today. If you like the company and think it’s a great deal, wait and buy during the possible cyclical downturn in the semiconductor market, not near the peak.