Nvidia Stock Faces Challenges: A 20% Drop and Potential Warning Signs

Are These 2 Things Warning Signs for Nvidia Investors? | The Motley Fool

Two points in the latest earnings report may prompt investors to question the company's momentum. Nvidia (NVDA -9.53%) has wowed investors continuously with its earnings growth, and that's led to a soaring share price. The stock has climbed 2,500% over five years and is heading for a 140% gain this year. The reason for such performance is simple. Nvidia has become a giant in one of today's highest-growth businesses: artificial intelligence (AI). The tech powerhouse dominates the AI chip market, with 80% share, and offers customers a full suite of AI products and services. All of this has translated into growth, helping Nvidia report record revenue quarter after quarter and surpass analysts' earnings estimates. That was the case in the most recent quarter, as revenue reached $30 billion -- that's more than the company's full-year revenue as recently as the 2023 fiscal year. Demand continues to soar for Nvidia's products, and the company is even about to launch its new architecture, Blackwell, in the coming months. Still, two things in Nvidia's latest report weren't as bright as the rest of the picture. Are they warning signs for Nvidia investors? Let's find out. First, a bit of background on Nvidia and its path so far. Over the years, Nvidia transitioned from developing graphics processing units (GPUs) to power video games and expanded the use of these powerful chips into other industries. And one of these other industries is AI. Today, Nvidia's GPUs are most sought-after for many crucial AI tasks, such as the training and inferencing of large language models. This has helped the company's earnings and share performance to explode -- and has made it one of investors' favorite technology stocks. Now, let's get to the two items in Nvidia's recent earnings report that may cause concern. The company maintained its track record of triple-digit revenue growth, but the pace slowed compared to previous quarters. Nvidia achieved revenue growth of more than 200% over the three earlier quarters year over year -- in the most recent period, though, growth slowed to 122%. And Nvidia's outlook for the next quarter would represent growth of 79% from the year-earlier period. The second point to consider is the company's gross margin, which came in at about 75%. This level is fantastic -- but it's lower than last quarter's 78.4% gross margin. If we look at these elements alone, we might wonder if Nvidia's spectacular growth is finally slowing down. Such a potential slowdown could lead to a drop in the share price, especially considering the stock's valuation today. Nvidia trades for roughly 40 times forward earnings estimates. But before hitting the sell button or turning our backs on Nvidia, let's consider the reason behind Nvidia's slower growth and lower gross margin in the recent quarter. Starting with revenue, it's important to note that comparison periods are getting more and more difficult for Nvidia -- that's because we're now comparing to a time just one year ago when major customers were already pouring investment into Nvidia GPUs. Prior to that point, investment in AI was lower, offering Nvidia much more room to deliver explosive growth. That said, Nvidia continues to expand its offerings -- for example, in the area of enterprise AI -- and pledges to update its GPUs on an annual basis. All of this should keep the company in its leadership position and maintain high levels of growth. As for gross margin, I would expect to see some fluctuation at a time like right now as Nvidia prepares to ramp up Blackwell's production. The costs of launching a new product and the process of ramping are weighing on margin at the moment. But even in this context, Nvidia has forecast gross margin of 75% for the upcoming quarter and around that level for the full year -- and all of this is well above the company's profit margin over time. So let's get back to our question: Are Nvidia's slowing revenue growth and lower gross margin figure warning signs for investors? Not at all. They don't represent a decline in demand or a weakening of Nvidia's ability to generate profit from its products and services. Instead, they reflect where Nvidia is at right now: The company may have passed the initial boom -- the time when customers just began pouring investment into AI -- but the growth story has plenty of chapters ahead. Customers continue to prioritize AI spending, and Nvidia aims to roll out major new products on a regular basis and gain efficiency as it produces these products at scale. All of this signals plenty of growth ahead, offering Nvidia investors reason to be optimistic.

Nvidia Stock Plunged (Again) Today and Is Now 20% Off Its High. Is the Stock Still a Buy? | The Motley Fool

Investor concerns and a lofty valuation have punished the chipmaker, but the future still looks bright. Nvidia (NVDA -7.81%) stock started off September not with a bang but with a whimper. Late last week, the company reported the results of its fiscal 2025 second quarter (ended July 28), and while the results were better than expected, they weren't as robust as some investors had hoped. The stock was under pressure again on Tuesday, falling as much as 8.4%. As of 12:27 p.m. ET, the stock was still down 7.8%. Despite some ongoing uncertainty, investors should take a step back and look at the big picture. Some investors have become skittish about Nvidia stock in recent weeks, and it's easy to understand why. After five consecutive quarters of triple-digit year-over-year growth, management is forecasting a moderate deceleration, guiding for revenue growth of 80% in the third quarter. Sure, that's slower than it has been, but it's enviable growth nonetheless. Another issue weighing on investor sentiment is Nvidia's waning gross margin of 75.1%. While that's an increase compared to 70.1% in the prior-year quarter, it's down from 78.4% in the first quarter. Some investors fear this could be the beginning of a new trend, but that conclusion is premature. Nvidia is scheduled to begin shipping its next-generation Blackwell artificial intelligence (AI) processors later this year, and previous new product launches have improved margins. This time will likely be no different. Finally, stories emerged over the weekend of a tussle between China and Japan regarding sanctions on advanced chipmaking equipment, with the former threatening "economic retaliation," according to a report by Bloomberg. This disagreement could potentially spill over into the broader AI sector, but it's simply too early to tell. Thanks to soaring AI adoption, Nvidia stock has gained more than 650% since early last year (as of this writing) and has seen a commensurate jump in its valuation, currently selling for roughly 38 times forward sales. While that's certainly a premium, Nvidia's track record shows it's worth paying up for. It's still early days for the adoption of generative AI, with the market expected to be worth $1.3 trillion by 2032, according to Bloomberg Intelligence. That shows there's still plenty of time for Nvidia to continue tapping this emerging opportunity.