3 Things Bears Have Wrong About Nvidia Right Now

There's no shortage of naysayers when it comes to Nvidia (NASDAQ: NVDA). Just 1.18% of its outstanding shares are currently being shorted, but think about what that means for a company with a market cap just above $5.5 trillion.

There are nearly $57 billion in short positions out there, and that doesn't include put options, bearish ETFs, or other derivative activity. The actual number of shares sold short has actually increased 40% over the past year, and the value of those bearish wagers has risen another 35% on top of that.

The bears are everywhere, but I see that as more of an opportunity than a threat. Let's go over some of the knocks on Nvidia. I want to counter by pointing out what the worrywarts might be missing.

Image source: Getty Images.

1. Nvidia is priced for perfection

There is nothing that I love more than when a bear argues that a stock is "priced for perfection." The assumption is that current expectations are too high and that the stock is bumping up against the ceiling, with so much air below it on the way down to the floor.

Last month's fiscal second quarter was a perfect example of Nvidia stock perpetually scaling the wall of worry. Bears were banking on analysts aiming too high by targeting 97% in top-line growth. It would be the fourth consecutive quarter of accelerating year-over-year growth.

How is that possible with a company as large as Nvidia? Expectations were high. Reality was kinder. Here's a look at the company's top-line growth:

• Q2 FY 2026: 56%
• Q3 FY 2026: 63%
• Q4 FY 2026: 73%
• Q1 FY 2027: 85%
• Q2 FY 2027: 106%

The late-August financial update gets even better. Those same analysts tagged by bears as overly ambitious are serial lowballers. They projected revenue would decelerate sharply to just 45% for fiscal year 2028, which starts in February. Nvidia shattered those crystal balls two weeks ago by forecasting 70% growth for next year.

Perfection isn't the ceiling. Market winners thrive in the debunking process.

2. Rivals will gain market share at Nvidia's expense

It would be naive for a bull like me to assume that Nvidia will be the king of the hill forever. Competitive advantages can weaken over time, just as they have been strengthening for years. A disruptor can pioneer a better mousetrap for the AI revolution or whatever giant tech trend comes next.

The one thing that's fair to say is that it's not happening now. Let's have Advanced Micro Devices (NASDAQ: AMD) enter the chat. AMD has a colorful history of needling the market leader, and it's certainly cashing in on the AI boom Nvidia is championing.

AMD stock has outperformed Nvidia over the past year by more than tripling. However, in its latest quarter -- and I'll point out that their fiscal quarters ended about a month apart -- AMD's overall revenue rose just 50%, half of Nvidia's top-line growth.

I'll beat the bears to what they're thinking. Zoom in on AMD's data center business, which now accounts for more than half (58%) of its revenue, and that business skyrocketed 107% for the quarter. That's awesome, but Nvidia's data center revenue, which accounts for 93% of its results, soared 117%.

In the end, AMD's data center business delivered $3.5 billion in incremental revenue compared to a year earlier. Nvidia tacked on $48 billion in incremental data center revenue.

3. Margins will inevitably contract

Let's close on a margin of error. Nvidia's gross margin was 75% in its latest quarter. The adjusted net margin was a jaw-dropping 56%. It's easy to question the sustainability of those levels. Unlike the flawed "priced for perfection" argument, there is a clear ceiling here: Gross margin will never exceed 100%, and the after-tax adjusted bottom line will naturally be well below that.

The reasonable bear case is that growth may continue but decelerate. Margins will contract, so earnings will grow even slower than the slowing top line -- if not eventually turn into negative year-over-year earnings growth.

Set aside that high bandwidth memory (HBM) makers riding Nvidia's coattails are currently generating gross margins approaching 85%. With competition percolating, Nvidia will need to keep innovating and fortifying its moat. It probably has more pricing flexibility now than the bears think. With third-party HBM becoming a larger cost component in the AI build-out, won't it make it even riskier for a company to bank on non-Nvidia AI chips and accelerators?

In the meantime, you can buy the stock for less than 15 times next year's projected earnings. This is why the bears aren't arguing that Nvidia is too expensive, as it's trading at a discount to the overall market despite growing substantially faster. Nvidia will be volatile, but it's built to win.

Rick Munarriz has positions in Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.