Nvidia’s latest fiscal fourth-quarter earnings report painted a picture of robust performance, comfortably exceeding Wall Street’s revenue and earnings expectations. While the initial surge in after-hours trading suggested elation, the enthusiasm tempered, leading to a dip in stock performance on Thursday. This recalibration may stem from cautionary notes sounded by CFO Colette Kress during the company’s earnings call, particularly concerning inventory levels.
For an extended period, the demand for Nvidia’s cutting-edge AI chips has significantly outpaced supply. This scarcity has challenged even the most prominent hyperscale customers, including tech giants like Microsoft, Amazon, Meta, and Alphabet, in their efforts to secure sufficient quantities. This imbalance has strategically allowed Nvidia to implement price increases and consequently expand its gross margins.
Kress highlighted an 8% quarter-over-quarter increase in inventory, further noting that Nvidia has secured “inventory and supply commitments in place to address future demand, including shipments, extending into calendar 2027.” While enhanced visibility into future business is generally perceived as a positive indicator, a potential concern for investors might be the prospect of a more balanced supply-demand dynamic, which could, in turn, put pressure on Nvidia’s ability to maintain its current elevated profit margins.
The company reported a non-GAAP gross margin of 75.2% for the quarter. Looking ahead, Nvidia projects a gross margin between 74.5% and 75.5% for the upcoming quarter, with an expectation of “in the mid-70s” for the entire fiscal year. Despite the seemingly stable near-term margins, questions arose regarding the long-term sustainability of these figures. An analyst from Melius Research posed a question to CEO Jensen Huang about the durability of these margins beyond 2027. Huang’s response emphasized Nvidia’s commitment to innovation: “If we could deliver generational performance per watt that exceeds dramatically what Moore’s Law can do — if we can deliver performance per dollar dramatically more than the cost of our systems — then we can continue to sustain our gross margins.”
For the present, however, investors appear to be factoring in the possibility that Nvidia’s peak pricing power in the high-demand AI chip market might be receding. This sentiment is also echoed across the broader semiconductor industry, with the PHLX Semiconductor Index experiencing a notable downturn of 3.5% on the day, underscoring a wider market recalibration.
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