Ever since the emergence of the internet around three decades ago, investors have been drawn to new trends and innovations, but nothing has captured attention quite like the impact the internet had on corporate America.
Despite various estimations, the analysts at PwC foresee an impressive $15.7 trillion contribution to the global economy by artificial intelligence (AI) by the start of the new decade.
No company has savored the benefits of the AI revolution quite like Nvidia (NASDAQ: NVDA).
Image source: Getty Images.
Nvidia’s Unprecedented Rise in the Market
At the onset of 2023, Nvidia stood as a $360 billion company at the cusp of being one of America’s pivotal tech stocks. By the close of the market on Aug. 28, 2024, its value soared to $3.09 trillion. In June, it briefly reigned as the most valuable publicly traded company following a remarkable 10-for-1 stock split.
Unquestionably, Nvidia’s H100 graphics processing unit (GPU) emerged as the preferred chip in AI-accelerated data centers, propelling the company’s market dominance.
Demand for Nvidia’s hardware outstripped supply, granting the company immense pricing leverage. While Advanced Micro Devices (NASDAQ: AMD) sold its AI-GPU for $10,000-$15,000, Nvidia’s H100 commanded prices ranging from $30,000 to $40,000.
Nvidia’s CUDA software platform, pivotal to its success, enabled developers to construct Large Language Models (LLMs) and optimize GPU computing capacity. CUDA fostered customer loyalty to Nvidia’s suite of products and services.
As a consequence, Nvidia has seen six consecutive quarters of sales and profit figures surpassing Wall Street analysts’ expectations.
Yet, a lesser-known performance metric insinuates that Nvidia’s prime days may be fading.
A Worrisome Decline: Nvidia’s Operating Metric Spotlight
As anticipated, Nvidia exceeded Wall Street’s revenue and earnings per share estimates for the fiscal second quarter. However, these headline numbers don’t reveal the whole story.
Nvidia’s gross margin, especially the adjusted figure, provides a more comprehensive outlook on its trajectory. Across five quarters, Nvidia’s adjusted gross margin soared to an astonishing 78.35% during the fiscal first quarter, a testament to the company’s ability to command premium pricing for its AI-GPUs.
In its first-quarter report, Nvidia projected an adjusted gross margin of 75.5% (+/- 50 basis points) for the fiscal second quarter. Should it stay within this range, it would signify the first sequential quarterly decline in adjusted gross margin after two years.
Post the earnings release on Aug. 28, Nvidia disclosed a dip in adjusted gross margin by 320 basis points to 75.15%. While within the projected range, it landed at the lower end of market expectations.
Furthermore, Nvidia’s outlook for the fiscal third quarter hints at potential additional challenges.
The Uphill Battle: Nvidia Faces Challenges Amid Gross Margin Contraction
Despite a substantial rise in Nvidia’s adjusted gross margin over the last 18 months, recent forecasts indicate a worrisome picture unfolding.
Image source: Getty Images.
The Impact of Competition and History
Nvidia’s gross margin expansion, fueled largely by AI-GPU scarcity and formidable pricing power, faces setbacks. As competitors like AMD ramp up production and chip fabricator Taiwan Semiconductor alleviates supply constraints, Nvidia’s pricing leverage weakens.
Moreover, a surge in CoWoS capacity by Taiwan Semiconductor leads to inevitable cost escalations for Nvidia, affecting production expenses significantly.
Internally, Nvidia grapples with the development of in-house AI-GPUs by its top customers, posing a threat to its market share within high-compute data centers.
Looking back over the last three decades, the technology industry has seen bubbles form around groundbreaking innovations in their early stages. The artificial intelligence sector, like those before it, requires time to mature, hinting at potential challenges for Nvidia.
Investment Implications
For prospective investors, heightened uncertainties signal caution when considering Nvidia stock. The company’s adjusted gross margin projection further reinforces concerns over its future performance.
Amidst wavering direction from businesses investing in AI and Meta Platforms’ delayed monetization plans, Nvidia’s sustainability emerges as a topic of growing worry.
Historically, the absence of a concrete game plan unveils vulnerabilities within Nvidia’s strategy, hinting at potential drawbacks for investors moving forward.
Considering Investment Opportunities
Before diving into Nvidia stock, evaluating recent analyses from market experts is prudent. The Motley Fool Stock Advisor team presents alternative investment avenues to consider, steering away from Nvidia as a top pick.
Reflecting on past performances, the service’s recommendations showcase the potential for significant returns, dwarfing standard market benchmarks since its inception in 2002.
*Stock Advisor returns as of August 26, 2024
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. Sean Williams has positions in Meta Platforms. The Motley Fool has positions in and recommends Advanced Micro Devices, Meta Platforms, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.