Down 17%, Is It Time to Buy the Dip on Nvidia Stock?

Over the last few years, Nvidia (NASDAQ: NVDA) has emerged as the leader of America's tech industry -- riding a tidal wave of demand for its cutting-edge chips used to train and run AI algorithms. However, with shares down 17% year to date, the company has hit a roadblock as a combination of trade uncertainty and possible foreign competition calls its growth thesis into question.

Should investors buy the dip or stay far away from this technology leader? Let's dig deeper to find out.

Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Learn More »

Nvidia's problem is deeper than tariffs

While it's easy to blame Nvidia's recent dip on the Trump administration's trade policy, that's only part of the story. Semiconductors are exempt from U.S. tariffs (although this could change in the future), and Nvidia has already made significant strides to onshore its supply chain -- even sourcing its latest Blackwell-based graphics processing units (GPUs) from Taiwan Semiconductor Manufacturing's new manufacturing facility in Arizona.

The real problem started in January, with the launch of DeepSeek R1 -- a Chinese large language model (LLM) that reportedly matched the performance of industry leaders like ChatGPT despite using less-advanced H800 chips.

While there has been debate about DeepSeek training costs and possible intellectual property violations, it raises some alarming questions.

Can cheaper alternatives replace Nvidia's most advanced GPUs? Will the high-cost American AI software industry be undermined by more affordable options in China and other parts of the world? It is still too early to have an answer to these questions, but the uncertainty clearly weighs on Nvidia's stock price, even though growth remains strong.

Could clients start diversifying their supply chains?

While DeepSeek's full impact is yet to be seen, there is already evidence that Nvidia's clients are seeking to reduce their reliance on the company by turning to in-house hardware solutions. In February, OpenAI finalized an agreement with TSMC to develop its first generation of custom AI chips with plans to launch them in 2026.

Custom chips are AI chips designed for a specific workload. This characteristic means they can operate with fewer unneeded components, making them more efficient than Nvidia's one-size-fits-all solutions. Perhaps more importantly, they allow clients to skip a costly middleman.

Image source: Getty Images.

Nvidia's products aren't cheap. In the fiscal fourth quarter, the company boasted a gross margin of 73.5%, which is surprisingly high for a hardware company. To put that number into perspective, software-as-a-service (SaaS) giant Microsoft has a gross margin of 69%.

Custom chips can allow customers to buy AI hardware for closer to their production cost. And OpenAI isn't the only major Nvidia client exploring this option. Alphabet, Amazon, and Meta Platforms already make custom chips, while Tesla is working on Dojo D1, which is designed for its AI supercomputer. As a fabless chip designer (that doesn't actually manufacture its chips), Nvidia's business model is a target for competition from its high-tech rivals, who can also make deals with its manufacturing partner, TSMC.

The valuation is at rock bottom

So far, Nvidia's potential challenges from DeepSeek and custom chips have had no noticeable impact on its operational results. Business is booming, with fourth-quarter revenue surging 78% year over year to $39.3 billion, driven by the successful rollout of the company's new Blackwell AI data center chips. Net income soared 80% to $22.1 billion.

Against these stellar results, Nvidia's forward price-to-earnings (P/E) multiple of just 25 looks perplexingly cheap. That said, investors shouldn't rush to buy the stock until there is more clarity on these long-term challenges.

Should you invest $1,000 in Nvidia right now?

Before you buy stock in Nvidia, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Nvidia wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you’d have $502,231!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $678,552!*

Now, it’s worth noting Stock Advisor’s total average return is 800% — a market-crushing outperformance compared to 156% for the S&P 500. Don’t miss out on the latest top 10 list, available when you join Stock Advisor.

See the 10 stocks »

*Stock Advisor returns as of April 14, 2025

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.