NVIDIA's Networking Growth Reinforces AI Dominance Amid Valuation Concerns

What happened

A Zacks article highlights NVIDIA's fast-growing networking business as AI clusters expand, driving record revenue and margins. DeepValue's report confirms networking revenue surged 105% year-over-year in Q3 FY2026, contributing to overall data center growth of $51.2B. This segment, including NVLink and InfiniBand, is key to NVIDIA's full-stack AI platform, supporting high gross margins of 73-75%. However, the stock trades at ~43x earnings and ~50x EV/EBITDA, approximately 425% above a conservative DCF estimate, indicating significant overvaluation. Thus, while networking bolsters competitiveness, it does not mitigate risks like export controls or hyperscaler concentration that underpin the 'WAIT' stance.

Implication

The networking growth enhances NVIDIA's ecosystem moat, making it harder for competitors to displace its AI infrastructure. Yet, current stock prices already reflect perfection, leaving little margin for error if growth slows. Export controls on advanced GPUs and networking could abruptly curtail expansion, as seen with past inventory charges. Monitoring data center revenue and margins is crucial for signs of deceleration that might trigger a de-rating. Overall, patience is warranted until valuations align with intrinsic value or risks diminish.

Thesis delta

The news confirms NVIDIA's networking business as a strong growth driver, aligning with the master report's observation of its hyper-growth and margin benefits. However, it does not alter the core thesis that the stock is overvalued and faces significant tail risks from export controls, hyperscaler concentration, and regulatory scrutiny. Therefore, the 'WAIT' recommendation remains unchanged, with no shift in investment stance.