About thirty years ago, the advent of the Internet changed the growth trajectory for companies around the world. While it took a few years for the Internet to mature as a technology and for companies to fully understand how to leverage its potential, it has had a remarkably positive impact on long-term growth trends.
Since the mid-1990s, Wall Street has patiently waited for the next leap forward for corporate America. Over the past two years, artificial intelligence (AI) appears to have answered this call.
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Image source: Getty Images.
AI-powered software and systems have the ability to become more proficient at their assigned tasks, and to learn new skills without human intervention. This ability to learn and evolve over time is what gives this technology seemingly limitless possibilities and usefulness in most industries around the world.
While the AI ​​ecosystem is vast, allowing countless companies to flourish, no company has been a more direct beneficiary of AI’s rise than the cutting-edge semiconductor stocks. Nvidia(NASDAQ: NVDA). Since the start of 2023, Nvidia’s market value has skyrocketed from $360 billion to over $3.6 trillion, making it the largest publicly traded company at the time of writing.
Less than two years ago, when Nvidia opened the hood for fiscal 2023 (Nvidia’s fiscal year ends at the end of January), the company reported full-year revenue of $27 billion. In the current fiscal year (2025), sales are closer to $129 billion in annual sales, while Wall Street expects sales of almost $192 billion next year.
This otherworldly growth is a feature that makes Nvidia’s AI graphics processing units (GPUs) the preferred choice for companies running high-compute data centers. TechInsights analysts estimate Nvidia’s share of GPU shipments to data centers at 98% in 2022 and 2023. Based on the company’s two-year sales surge, it would be a reasonable assumption that Nvidia’s H100 GPU (commonly known as the “Hopper” ) and successor Blackwell GPU architecture have no trouble finding buyers.
Nvidia has also been able to benefit from the law of supply and demand. With orders for the Hopper and the next-generation Blackwell chip postponed, the company has been able to significantly increase the price for its hardware. The roughly $30,000 to $40,000 price tag for the Hopper represents a 100% to 300% premium over what Advanced micro devices(NASDAQ: AMD) is delivering its MI300X chips for AI-accelerated data centers.
Credit must also be given to Nvidia’s CUDA software platform for its near-by-the-book operational expansion. CUDA is the toolkit developers use to maximize the potential of their Nvidia GPUs, including building large language models. This platform has helped keep customers loyal to Nvidia’s products and services.
While everything seems to be going perfectly for Nvidia, as its stock performance suggests, one metric in the company’s recently released third-quarter operating results (for the quarter ended October 27) tells a different story.
As expected, Nvidia’s core numbers look as good as advertised. Quarterly revenue rose 94% from the same quarter last year to $35.08 billion, while net profit rose 109% to $19.3 billion. Both were well above the Wall Street consensus forecast.
But there’s one exceptionally important number that’s showing signs of weakness, and it foreshadows the very real possibility of Nvidia stock at the top.
When Nvidia lifted the hood on its first-quarter operating results in May, it reported a scorching 78.4% gross margin. The dramatic increase in the company’s gross margin is a function of AI GPU scarcity and the aforementioned exceptional pricing power.
NVDA gross profit margin data (quarterly) according to YCharts. The chart above does not yet reflect Nvidia’s fiscal third quarter gross margin of 74.6%.
However, the tide is turning. After a gross margin of 78.4% in the first quarter of 2025, Nvidia reported a gross margin of 75.1% in the second quarter of 2025 and 74.6% in the last quarter. For the fiscal fourth quarter, gross margin is forecast in the range of 73% to 73.5%, +/- 50 basis points.
While Nvidia’s gross margin is now significantly higher than before the AI ​​revolution took shape, this steady decline we are witnessing is evidence that AI GPU scarcity is waning and competition is increasing.
Most of Wall Street is focused on the external competition Nvidia will face. AMD has been steadily ramping up production of its MI300X AI GPUs and recently unveiled its next-generation MI325X chip, which it plans to put into production before the end of the year. AMD is a branded company with a rich history and a significantly cheaper AI GPU than Nvidia’s Hopper and Blackwell chips. Companies looking to gain first-mover advantages may be forced to skip the potentially long wait for Nvidia’s hardware and opt for AMD.
But the bigger problem for Nvidia could be competition from within. Many of the company’s top customers by net revenue are members of the “Magnificent Seven,” and all are developing AI GPUs in-house to deploy in their data centers. Even if these chips fall short of Nvidia’s hardware in computing capabilities, they are still significantly cheaper and easier to access.
Anything that reduces AI GPU scarcity will negatively impact Nvidia’s pricing power and gross margin.
Image source: Getty Images.
Based on the trend we’re seeing in Nvidia’s gross margin, the stock has likely peaked. But history also wants a word.
Even though the Internet transformed the business world thirty years ago, it took time for the technology to mature and for companies to be able to use it properly to generate a positive return on their investments. Every subsequent major innovation in the past thirty years, including the Internet, has worked its way through a first-innings bubble-bursting event.
What this tells us is that investors consistently overestimate how quickly a new technology will be widely adopted by consumers and/or businesses. It also suggests that investors are overly optimistic about the usefulness of advanced technologies. While artificial intelligence could be exactly the game changer Wall Street expects it to be, it will take time for companies to figure out how to best use AI. This is what leads to high expectations ultimately falling short.
Investors are seeing this dynamic game play out right before their eyes. Even with significant investments in AI data centers from some of Wall Street’s leading firms, most of these companies lack a clear plan to generate a positive return on their AI investments in the near term. The utility aspect of AI is currently not well understood – and that’s scary for a company whose gross margin has fallen decisively.
Consider the following before buying shares in Nvidia:
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.
Have Nvidia Stocks Peaked? A single metric provides a very clear answer. was originally published by The Motley Fool
