Nvidia's Share Price Potentially Peaked? A Specific Indicator Provides an Undeniable Response.
Around thirty years ago, the advent of the internet revolutionized the growth trajectory of businesses worldwide. Although it took a few years for the internet to develop and for businesses to comprehend its potential, its impact on long-term growth trends has been significantly positive.
Since the mid-1990s, Wall Street has eagerly anticipated the next major advancement for corporate America. Over the past two years, artificial intelligence (AI) seems to have come through.
AI-powered software and systems demonstrate the capability to become more adept at their tasks over time and learn new skills without human intervention. This feature to adapt and evolve makes this technology exceptionally valuable in various industries globally.
Though the AI ecosystem is extensive, offering numerous business opportunities, no company has benefited more directly from the growth of AI than cutting-edge semiconductor stock, Nvidia (NVDA -2.55%). Since 2023 began, Nvidia's market value surged from $360 billion to over $3.6 trillion, making it the largest publicly traded company presently.
Nvidia's expansion has been remarkably straightforward
Less than two years ago, when Nvidia unveiled its fiscal 2023 revenue (which ends in late January), the company reported $27 billion in full-year sales. In the current fiscal year (2025), it's projected to approach $129 billion in full-year revenue, with expectations for almost $192 billion in sales next year.
This unprecedented growth is primarily due to Nvidia's AI-graphics processing units (GPUs) being the preferred choice for businesses operating high-compute data centers. The analysts at TechInsights estimated Nvidia's share of GPU shipments to data centers at 98% in 2022 and 2023. Given Nvidia's two-year sales surge, it's fair to presume that its H100 GPU (commonly known as the "Hopper") and successor Blackwell GPU architecture are in high demand.
Nvidia has also successfully leveraged supply and demand. With orders for the Hopper and next-generation Blackwell chip backlogged, it's increased its hardware price significantly. The $30,000 to $40,000 cost of the Hopper represents a 100% to 300% premium compared to what Advanced Micro Devices (AMD -5.57%) is earning for its MI300X chips for AI-accelerated data centers.
Nvidia's CUDA software platform deserves recognition for its contribution to Nvidia's virtually textbook operating expansion. CUDA is the platform developers use to optimize the performance of their Nvidia GPUs, including building large language models. This toolkit has helped maintain customer loyalty to Nvidia's diverse product and service offerings.
Although Nvidia's stock performance indicates everything is going well for the company, one metric from its recently reported third-quarter operating results (for the quarter ended Oct. 27) tells a different story.
This single metric hints that Nvidia stock has peaked
As expected, Nvidia's headline figures were impressive. Quarterly sales increased 94% from the previous year to $35.08 billion, while net income swelled 109% to $19.3 billion. Both surpassed Wall Street's estimates.
However, there is a crucial figure that indicates weakness and signals the possibility of the top being in for Nvidia stock.
When Nvidia shared its first-quarter financial results in May, it reported an outstanding gross margin of 78.4%. The substantial improvement in Nvidia's gross margin is a result of AI-GPU scarcity and its impressive pricing power.
However, the trend is shifting. After delivering a 78.4% gross margin in Q1 2025, Nvidia recorded a gross margin of 75.1% in Q2 2025 and 74.6% in the most recent quarter. For the fiscal fourth quarter, Nvidia forecasts a gross margin of 73% to 73.5%, +/- 50 basis points.
Although Nvidia's gross margin is considerably higher now than it was before the AI revolution emerged, this steady decline is evidence that AI-GPU scarcity is dwindling and competition is intensifying.
Most analysts focus on the external competition Nvidia will face. AMD has been steadily ramping up the production of its MI300X AI-GPUs and recently unveiled its next-gen MI325X chip, which it plans to produce before the end of the year. AMD is a well-known company with a rich history and a more affordable AI-GPU than Nvidia's Hopper and Blackwell chips. Businesses seeking early adoption advantages may seek AMD's hardware instead of waiting for Nvidia's, which could impact Nvidia's sales.
But the more significant challenge for Nvidia might be the competition it faces internally. Many of its top customers by net sales are part of the "Magnificent Seven," and they are developing their own AI-GPUs to deploy in their data centers. Even if these chips don't match Nvidia's in terms of computing capabilities, they are still notably cheaper and more readily available.
Any development that reduces AI-GPU scarcity will adversely impact Nvidia's pricing power and its gross margin.
According to the pattern we're noticing with Nvidia's profit margin, its shares might have reached their peak. However, history has a perspective to share as well.
While the internet revolutionized the commercial sector around three decades ago, it took some time for the technology to grow and for businesses to effectively leverage it for a profitable return. Every groundbreaking innovation over the past 30 years, including the internet, has experienced an initial phase of overinflation followed by a deflation event.
This trend indicates that investors tend to overestimate how swiftly a new technology will gain widespread acceptance among consumers and businesses. It also hints at investors being overly hopeful about the potential of advanced technologies. Though artificial intelligence has the capacity to be as transformative as the market anticipates, it will take some time for businesses to grasp its full potential. This leads to inflated expectations eventually failing to materialize.
Investors are witnessing this pattern unfold. Despite substantial investments in AI infrastructure from some of Wall Street's key players, many companies are still struggling to devise a strategy to generate a profit from their AI investments in the near future. The usefulness of AI isn't yet fully grasped, which is a concerning matter for a company whose profit margin is on a downward spiral.
In light of Nvidia's remarkable growth, some investors may see opportunities for investing in related companies that benefit from the AI revolution in the finance sector. For instance, many financial institutions are increasingly using AI for tasks such as risk assessment, fraud detection, and algorithmic trading.
Additionally, the increasing reliance on AI in various industries could lead to a surge in demand for data and related services, potentially creating opportunities for companies that specialize in data management and analysis. Businesses that invest in these sectors could potentially reap significant financial returns over the long term.
