Nvidia’s gross margin guidance suggests pricing pressures that could signal an end to the irrational enthusiasm around artificial intelligence (AI) stocks.
In the mid-1990s, the advent of the internet opened new doors for American businesses and forever changed their growth trajectory. But for more than a quarter century, professional and public investors have wondered what innovation will be as transformative for businesses as the internet was. Artificial intelligence (AI) seems to be the answer of choice to this age-old question.
AI allows software and systems to manage tasks previously performed by humans. What gives AI such broad potential is its ability to learn and evolve. PwC predicts that artificial intelligence will add $15.7 trillion to the global economy by 2030. Without it Human intervention.
AI stocks have been on a virtually unstoppable rally over the past 18 months, but the enthusiasm for AI may be changing. NVIDIA (NVDA -2.61%) He is the culprit behind it.
Image source: Getty Images.
Nvidia’s expansion was nearly flawless
Before we delve into the negatives, let’s point out something worth celebrating: Semiconductor giant Nvidia has leveraged its first-mover advantage to become the leading provider of graphics processing units (GPUs) in AI-accelerated data centers.
According to an analysis by researchers at TechInsights, of the 3.85 million GPUs shipped to enterprise data centers last year, Nvidia accounted for 3.76 million. In case you’re wondering, that equates to a whopping 98% market share.
In addition to first-mover advantage, Nvidia has a distinct computing advantage over its competitors. Intel (International Trade Commission -5.42%) and Advanced Micro Devices (AMD -2.69%) The company, which is trying to catch up with NVIDIA’s highly sought-after H100 GPUs, is preparing to roll out its next-generation GPU architecture, known as Blackwell. In June, CEO Jensen Huang also teased Blackwell’s successor, Rubin, which is expected to hit the market in 2026.
Demand for Nvidia’s chips is also outstripping supply. When a high-demand commodity becomes tight, it’s not uncommon for the selling price of that commodity to rise substantially. Nvidia was able to push the price of the H100 to more than $40,000 per chip at one point. As a result, the company’s adjusted gross margins expanded significantly to 78.35% during the first quarter (ended April 28).
The AI revolution has helped Nvidia’s stock price rise 706% and add more than $2.7 trillion to its market capitalization since the beginning of 2023. This historic expansion by one of Wall Street’s most influential companies led the company’s board to implement a 10-for-1 stock split in June.
But Nvidia’s glory days may not have lasted long.
Nvidia’s own predictions are an ominous warning of the challenges ahead.
No matter how high the bar is set, NVIDIA has beaten Wall Street’s revenue and profit expectations for the past five consecutive quarters. But the company’s second-quarter adjusted gross margin outlook presents an ominous warning that Wall Street and investors cannot ignore.
NVIDIA’s second-quarter guidance calls for adjusted gross margins of 75.5%, plus or minus 50 basis points, down 235-335 basis points from the adjusted gross margins of 78.35% reported in the first quarter.
In some sense, an adjusted gross margin of 75.5% is roughly 10 percentage points higher than where we are at the beginning of 2022. For a company the size of Nvidia, an adjusted gross margin of 75%-76% is still impressive.
NVDA Gross Margin (Quarterly) data from YCharts.
Meanwhile, this represents the first expected adjusted gross margin decline since the summer of 2022. More importantly, this appears to be a clear warning that the extraordinary pricing power Nvidia has enjoyed is starting to fade.
Intel and AMD have made no secret of their desire to chip away at Nvidia’s hardware monopoly in enterprise data centers: Intel unveiled its Gaudi 3 AI accelerator chip in April and plans to accelerate commercialization during the third quarter, while AMD is ramping up production of its MI300X AI-GPU, which is significantly cheaper than its H100 GPU.
While some aspects of the Gaudi 3 and MI300X are competitive with Nvidia’s H100, the latter has a clear computing power advantage. The problem for Nvidia is that it’s far from meeting customer demand. As a result, Intel and AMD shouldn’t have a hard time finding a strong market for AI-GPUs in the coming months.
In addition, Nvidia’s top four customers by revenue are: Microsoft, Meta Platform, Amazonand alphabet — develops AI-GPUs in-house for its data centers.
Like Intel and AMD, these home-grown chips are unlikely to match the computing power of Nvidia’s H100 or Blackwell architectures. teeth It will take up valuable real estate in AI-accelerated data centers.The development of these AI-GPUs also sends a pretty clear message that America’s most influential companies are looking to reduce their reliance on Nvidia hardware going forward.
A large part of Nvidia’s growth over the past five quarters has been driven by the company’s pricing power. With Intel and AMD flooding the market with chips and the four “Magnificent Seven” companies developing AI chips for their own internal use, the AI-GPU shortage that was driving Nvidia’s adjusted margin growth will likely subside. Nvidia’s forecasted adjusted gross margin decline likely speaks to these pricing pressures, which we expect to intensify in the coming quarters.
Image source: Getty Images.
But wait, there’s more
In addition to Nvidia’s own predictions seeming to portend trouble, history has not been all that kind to the next generation of big innovations, technologies, and trends.
When studied over time, some highly hyped trends have made investors extremely wealthy (e.g., the Internet), while others have fizzled (e.g., 3D printing and marijuana stocks). But one thing that all of the next big innovations and trends since the mid-1990s have in common is that they all experienced a bubble burst shortly after their birth.
To be clear, there is no way to accurately predict when the music will stop or the excitement will die down when it comes to a groundbreaking technology or trend. But looking back, there hasn’t been a single instance in the last 30 years where investors didn’t overestimate the adoption or usefulness of a new technology or trend.
While some investors may believe that artificial intelligence has the power to defy this unspoken rule, the reality is that most companies have no clear blueprint for how AI will increase revenue and profits, which of course indicates that they are overestimating the adoption and utility of this groundbreaking technology.
Looking out 10 or 20 years, I strongly believe there is a path for artificial intelligence to significantly increase global productivity and provide consumer benefits, but I expect that in the next year or two it will become painfully obvious to Wall Street and the investing public that most companies have no real plan for generating returns on their AI investments.
Taking history as a guide and Nvidia’s guidance as confirmation, I believe the AI bubble will burst sooner or later.
Suzanne Frey, an Alphabet executive, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and public relations at Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Sean Williams has investments in Alphabet, Amazon, Intel, and Meta Platforms. The Motley Fool has investments in and recommends Advanced Micro Devices, Alphabet, Amazon, Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel, long January 2026 $395 calls on Microsoft, short August 2024 $35 calls on Intel, and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
