Shares of Nvidia (NASDAQ: NVDA) were heading lower Thursday after the AI chip leader posted better-than-expected leads to its fiscal 2025 second-quarter report after the close Wednesday, but the corporate’s beat was not as wide as investors had turn into used to and management’s guidance was on the lighter side. Nvidia also reported a sequential decline in gross margin, indicating that it could have reached the boundaries of its margin expansion.
The stock was down by 6.4% as of three:14 p.m. ET, though a lot of its AI peers reminiscent of Arm Holdings rose, suggesting that some investors were interpreting the report pretty much as good news for AI demand broadly, and taking the chance to rotate into other AI stocks with more upside.
Nvidia plays the expectations game
Nvidia delivered one other strong quarter: For the period that ended July 28, revenue was up by 122% 12 months over 12 months to $30 billion and adjusted earnings per share soared by 152% to $0.68, each of which beat analysts’ consensus estimates.
Nonetheless, its gross margin slipped from 78.4% to 75.1%, which the corporate blamed on recent data center products and inventory write-downs related to the Blackwell platform. It was the primary time that Nvidia’s gross margin had shrunk within the generative AI era, and it appears to be an indication that its margin expansion has probably peaked.
Nvidia’s fiscal third-quarter guidance also seemed a bit underwhelming. Management forecast revenue of $32.5 billion, and while that was ahead of the consensus figure of $31.8 billion, it could amount to only 8% sequential revenue growth.
The corporate expects to launch its Blackwell platform in fiscal Q4, and that could possibly be causing a modest headwind to Q3 demand.
Must you buy the dip in Nvidia?
It is sensible for Nvidia stock to take a breather. In spite of everything, it’s up by nearly 1,000% because the start of 2023, shortly after ChatGPT was launched.
It now has a market cap of $3 trillion, just behind Apple and Microsoft within the race for the title of the most beneficial company on the planet, and the expected soaring growth it is going to experience from AI, no less than over the following few quarters, is essentially baked into its stock price. It trades at a forward P/E ratio of 43, which is dear, but reasonable.
Thursday’s pullback looks as if a superb opportunity for long-term investors to scoop up shares of Nvidia, as the corporate still dominates the AI hardware landscape. Nonetheless, investors might also need to take a cue from those that are rotating out of the stock into AI alternatives like Arm Holdings.
With its $3 trillion valuation, Nvidia’s upside potential is more limited than that of corporations like Arm, especially with its gross margin falling and its sequential growth decelerating.
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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Idiot has positions in and recommends Apple, Microsoft, and Nvidia. The Motley Idiot recommends the next options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Idiot has a disclosure policy.
Nvidia Stock Is Sliding. Is It a Buying Opportunity or a Warning Sign? was originally published by The Motley Idiot