Roughly three decades ago, the advent of the internet and its mainstream proliferation began changing the business world forever. Though this transformation didn't occur overnight, investors have been waiting quite some time for the next game-changing innovation to come along and bolster the long-term growth prospects of corporate America. After an extensive wait, artificial intelligence (AI) appears to have answered the call.
Software and systems are being empowered by AI to make decisions, reason, and evolve, all without the aid of human intervention. With use cases in most industries around the globe, it's perhaps no surprise that the analysts at PwC are forecasting a $15.7 trillion benefit to the global economy from AI by 2030.
No public company has taken the bull by the horns more during the early stages of the AI revolution than Nvidia (NVDA +1.13%). The company's Hopper (H100) and Blackwell graphics processing units (GPUs) have quickly become the standard for high-compute enterprise data centers responsible for training large language models and running generative AI solutions.
But with lofty growth expectations already baked into Nvidia's nearly $3.2 trillion market cap, there are three very specific reasons to believe Nvidia stock is poised to underwhelm following the release of its fiscal 2025 fourth-quarter operating results after the closing bell on Feb. 26.
Image source: Getty Images.
Waning AI-GPU scarcity
To give credit where credit is due, no chip company is particularly close to matching the computing speed of Nvidia's successor Blackwell chip, or even unseating the Hopper GPU at this point.
However, the company has also benefited immensely from AI-GPU scarcity. Overwhelming demand for Nvidia's hardware, coupled with limited supply, has helped it book orders well in advance, as well as charge a premium price for its AI-GPUs. Whereas Advanced Micro Devices was netting in the neighborhood of $10,000 to $15,000 for its Instinct MI300X AI-accelerating chips in early 2024, Nvidia was commanding up to $40,000 for its Hopper chip. The result was a gross margin that peaked at 78.4% in the first quarter of fiscal 2025.
The concern for Nvidia on and after Feb. 26 is that computing speed isn't everything in the AI space. It's dominated because it's been able to supply the in-demand hardware businesses are asking for. But as AI-GPU scarcity wanes, so will the company's pricing power and its supercharged gross margin.
While most investors have focused on direct competitors, such as AMD, the bigger threat is the possibility of losing out on valuable data-center real estate from its top customers by net sales. Most members of the "Magnificent Seven" are internally developing AI chips of their own. Even though these GPUs are unlikely to surpass the computing potential of Nvidia's Hopper and/or Blackwell chips, they're substantially cheaper and not backlogged. This is a recipe for future orders of Nvidia's hardware from America's most-influential businesses to disappoint.
We've already seen Nvidia's gross margin retrace by 380 basis points from its all-time high of 78.4% over the previous two quarters. Don't be surprised if growing internal and external competition, along with waning AI-GPU scarcity, weighs on Nvidia's gross margin and its stock.
Image source: Getty Images.
Tariffs and trade limitations
If there's one thing Wall Street tends to reward, regardless of valuation, it's predictability. Unfortunately, various uncertainties regarding tariffs and export limitations may lead to Nvidia's outlook containing more unknowns than usual.
While on the campaign trail, then-candidate Donald Trump was forthcoming about his willingness to use tariffs if elected to promote American interests. The idea behind tariffs is that imposing them on select imports can help domestic manufacturers be more competitive on price. Last week, Trump instituted a 10% tariff on select goods from China.
However, a December-released analysis from Liberty Street Economics, which publishes research for the Federal Reserve Bank of New York, found that the stock of public companies exposed to Trump's China tariffs in 2018 and 2019 performed notably worse on the days tariffs were announced than companies that had no exposure. These underperforming businesses also, on average, saw their profits, employment, sales, and labor productivity decline from 2019 to 2021.
While Nvidia doesn't import products from China, the world's No. 2 economy is one of its largest hardware purchasers. Strained trade relations between the U.S. and China could jeopardize billions of dollars in quarterly sales for Nvidia.
To make matters worse, the Biden administration restricted the export of Nvidia's high-powered AI chips to China for three consecutive years (2022 through 2024). Although President Trump and former President Joe Biden don't see eye-to-eye on much, protecting U.S. AI interests is one of those rare shared points. Trump or his administration are unlikely to loosen the regulations surrounding AI-GPU exports to China.
These limitations are likely to be reflected in Nvidia's outlook and may result in cautious commentary from its management team.
NASDAQ: NVDA
Key Data Points
Historic precedent
The third very specific reason Nvidia stock can underwhelm after reporting its fiscal 2025 operating results on Feb. 26 is historic precedent. History has a flawless track record when it comes to next-big-thing innovations, and that's bad news for the face of the artificial intelligence movement.
One of the more prevalent concerns for Nvidia is that every game-changing technological innovation for three decades, including the internet, has navigated its way through a bubble-bursting event. Bubbles form because investors have a terrible habit of overestimating how quickly a new technology will be adopted and/or gain mainstream utility. Although there are plenty of use cases, on paper, for AI, most businesses lack well-defined blueprints for optimizing the technology and meaningfully improving their sales and profits from it.
If there's a silver lining for Nvidia, it's the company's well-established business segments that pre-date the AI revolution. If the proverbial AI bubble were to burst, Nvidia stock would be partially buoyed by GPU demand for gaming and cryptocurrency mining, as well as demand for its virtualization software.
The other historic battle Nvidia will be fighting is against its pricey valuation. In June-July 2024, Nvidia stock surpassed a price-to-sales (P/S) ratio of 40, which has historically been a level that's signaled a top for other market-leading businesses of next-big-thing innovations. Even though Nvidia has backed off its P/S ratio high of last summer, its stock remains pricey -- especially given the laundry list of challenges described above.
Even though every Wall Street analyst expects Nvidia stock to rally in 2025, the table appears to be set for it to underperform.
