As the leading provider of chips that power artificial intelligence (AI), Nvidia (NVDA 1.53%) has become a bellwether for AI adoption. As such, investors were sitting on the edge of their seats when the semiconductor specialist reported its financial results. Despite serving up a beat-and-raise quarter, the stock fell, dragging the broader market down with it.
Nvidia stock was down more than 5% in early trading, while the S&P 500 and the Nasdaq Composite were down 1.2% and 2%, respectively (as of this writing). Here's why.
Image source: Nvidia.
Stellar by any measure
Nvidia reported the results of its fiscal 2026 fourth quarter (ended Jan. 25), and it was hard to find any fault with its performance. The company delivered record revenue of $68.1 billion, up 73% year over year, and adjusted earnings per share (EPS) of $1.62, up 82%. It beat analysts' consensus estimates for revenue of $66.2 billion and adjusted EPS of $1.54. Furthermore, management's outlook for Q1 revenue of $78 billion was $6 billion ahead of expectations of $72 billion. So what's not to like?
As with so many things, it's complicated. There are a number of factors weighing on investor sentiment, so it's difficult to draw a straight line between any one thing and the stock's decline. However, the most likely contributed is overall concern about the future of AI.
One issue is revenue concentration. Estimates suggest that between 40% and 50% of Nvidia's sales come from Microsoft, Meta, Amazon, and Alphabet, which is being fueled by strong demand for AI by their respective customers. Investors are concerned that, should demand dry up, so too will Nvidia's revenue -- which would result in a swift and severe adjustment in the company's stock price.
NASDAQ: NVDA
Key Data Points
Another concern is the ongoing shortage and soaring prices of memory and storage chips, which are essential parts of Nvidia's graphics processing units (GPUs) -- the company's bread and butter. While estimates vary, memory prices have surged by 80% to 90% over the past three months, with the cost of DRAM, NAND, and HBM chips all hitting record highs, according to Counterpoint Research. Nvidia has locked in prices through longer-term contracts with its suppliers and has thus far maintained its near-75 % gross margin. If the shortage persists, it could weigh on Nvidia's profitability.
Nvidia has become a large component of both the major stock market indexes in recent years. The stock represents more than 13.5% of the Nasdaq-100 and 7.4% of the S&P 500 -- so big moves by Nvidia tend to drag the stock market lower.
Fears about the state of AI have been percolating for a while now, and as an Nvidia shareholder, I view this as part of the cost of admission. The stock is currently selling for roughly 24 times forward earnings and 18 times next year's expected earnings, making it a compelling opportunity for investors with a long-term outlook.
