This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
With shares down 20% year to date, Nvidia (NASDAQ: NVDA) has been off to a bad start in 2025, even though its chip business continues to fire on all cylinders. Is the market predicting an end to the generative artificial intelligence (AI) hype cycle? Let's dig deeper to determine what the next nine months might have in store for the industry's leader.
Fourth-quarter earnings were not bad
When a company's stock starts falling, it's easy to blame poor operational performance. But that hasn't been the case for Nvidia. Fourth-quarter earnings show a business that is still firing on all cylinders. Revenue soared 78% from a year ago to a quarterly record of $39.3 billion, driven by strength in the company's data center segment, where it makes advanced AI chips for running and training large language models (LLMs).
While Nvidia started as a gaming chip designer, expensive data center hardware has become its bread and butter. Its latest AI chip, Blackwell, is estimated to cost a whopping $30,000 to $50,000 per unit. But these new products boast dramatic improvements in power and efficiency compared to their predecessors, potentially allowing clients to save money using them. According to CEO Jensen Huang, demand is "insane."
That said, everything isn't peaches and cream. Nvidia experienced a three-point drop in fourth-quarter gross margins (to 73%), but that was likely because of temporary challenges associated with the rollout of its new Blackwell chips. Management expects the trend to continue in the first quarter, with gross margins dropping to 71% as it ramps up production.
The market isn't impressed
At the time of writing, Nvidia's shares are down 14% from the release of earnings on Feb. 26. This dip suggests the market isn't very impressed with the company despite its high growth rate and the successful rollout of its Blackwell chips. Some might blame this on the falling gross margins. However, the bigger challenge may come from long-term demand.
In February, Microsoft shocked the tech world when it scrapped some leases for data centers in the U.S. The software giant is believed to be one of Nvidia's top consumers, and a reduction in its data center capacity could indicate a desire to reduce its exposure to the industry.
While Microsoft probably won't give up on AI, its CEO, Satya Nadella, suggests the technology isn't creating much meaningful value yet. If one of the industry leaders says this openly, other Nvidia clients (such as Alphabet and Meta Platforms) may feel the same way behind the scenes.
Further alarm bells are coming from another major Nvidia client, OpenAI. Last month, the generative AI start-up finalized a design with TSMC to make its own custom chips to reduce its reliance on third-party suppliers. Custom chips are designed for specialized workloads, so they have fewer unnecessary components, making them cheaper and more efficient compared to the one-size-fits-all GPUs typically provided by Nvidia.
If major clients scale back their AI investments and turn to custom chips, Nvidia's growth potential could be seriously eroded.
What's next for Nvidia?
With a market cap of $2.6 trillion, Nvidia is already a huge company. And future upside looks limited, especially as investors become more concerned with challenges like falling gross margins and potential demand erosion. That said, shares also look unlikely to crash in 2025.
With a forward price-to-earnings (P/E) multiple of just 25.5, Nvidia shares are valued only slightly higher than the Nasdaq-100 estimate of 25, making them quite affordable and reducing the risk of downside. The stock is likely to remain flat this year unless there is a severe deterioration in macroeconomic conditions, such as a recession.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
