Business has exploded for Nvidia (NVDA 1.18%) over the past few years, with revenue surging in the triple digits quarter after quarter, and reaching record levels well into the billions of dollars. This is thanks to the company’s position in one of today’s highest-growth markets: artificial intelligence (AI). Nvidia dominates the AI chip market, with 80% share, and also has built an AI empire, selling a wide variety of related products and services to customers.
And that’s helped the stock to skyrocket, gaining 2,400% over the past five years and heading for an annual increase of about 180%. Now, against this backdrop, Nvidia has reached a transition point. Its pace of revenue growth slowed in the recent quarter, and the company is beginning to launch a key product. Investors are carefully watching and wondering if Nvidia, following this big moment, will keep up its momentum or if it’s settling into a phase of slower growth. Want to know what’s next for this AI giant? A look at one key number could offer us some clues.
Image source: Getty Images.
A key part of AI programs
First, let’s check out Nvidia’s path so far, including the recent slowdown. Nvidia’s graphics processing units (GPUs) have emerged as the fastest on the market, making them a key part of AI programs, and this has resulted in major demand from the world’s biggest tech companies.
Players like Meta Platforms, eager to supercharge AI programs, and Amazon, aiming to offer the world’s best AI tools to customers through its Amazon Web Services business, have flocked to Nvidia for its products in recent years. And this has translated into soaring demand for the company’s newest offering, the Blackwell architecture and chip. Nvidia called demand “staggering” in its recent earnings call and has said it surpasses supply.
In spite of all of this, Nvidia’s revenue growth slowed in the recent quarter, shifting to double-digit growth from the triple-digit growth we’ve seen in previous quarters. Before worrying though, it’s important to take a look at the actual revenue figures, and here, we can see that comparison quarters have become very difficult. Considering demand for Nvidia’s products at the earlier stages of the AI boom, it was “easy” for the company to increase revenue in the triple digits in the second quarter of the 2024 fiscal year, for example, from the level of about $6 billion in the year-earlier period. Today, it’s more difficult to do this with quarterly revenue topping $35 billion. So, I wouldn’t look at this revenue trend as a sign of a slowdown at Nvidia.
Nvidia’s profitability on sales
Now, let’s consider what’s next for Nvidia, using a key number to help us. And this is gross margin. Along with Nvidia’s surging revenue, the company has been able to maintain margins of more than 70% — so it’s highly profitable on its sales.
Just ahead, we could expect profitability to dip slightly in the coming months as Nvidia completes the production ramp of Blackwell. Nvidia’s gross margin has been in the mid-70% range in recent times but will fall to the low-70% range, the company predicts. Even this level is pretty amazing, especially considering the complexity of the Blackwell rollout.
Blackwell is an architecture that can be tailored to the needs of each customer, with seven different chips, various networking options, and other customizable details. Organizing the production ramp of such a system and serving the needs of major tech company customers is Nvidia’s priority right now — and this along with the costs of putting these logistics into place will weigh on the profitability of each sale.
The second half of next year
So, we shouldn’t expect maximum profitability right out of the gate. But here’s the good news. Nvidia already is predicting gross margin will return to the mid-70% range, possibly in the second half of next year. That means we can expect Nvidia to maintain its high level of profitability. At the same time, demand suggests revenue, too, should continue to climb.
So, yes, we should expect a modest dip in profitability in the coming months as Nvidia ramps production of Blackwell, but this looks like a temporary situation. Over the long term, Nvidia is on track to keep up the momentum we’ve seen in recent quarters as customers pour investment into their AI platforms. Today’s $200 billion AI market is forecast to reach $1 trillion by the end of the decade, another positive sign for this AI leader.
All of this means that investors shouldn’t focus too much on the short term and instead should consider Nvidia’s long-term prospects. And Nvidia’s profitability track record and forecasts for gross margin to come are reasons to be optimistic.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Meta Platforms, and Nvidia. The Motley Fool has a disclosure policy.
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