Quarterly Outlook
Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?
John J. Hardy
Global Head of Macro Strategy
Global Head of Investment Strategy
Nvidia just dropped its latest earnings, and the numbers are nothing short of massive. In the fourth quarter, the AI chip giant posted:
But despite these stellar results, the stock traded in a narrow range of -2% to +2% in after-hours trading, as investors wrestled with whether the numbers were impressive enough to justify Nvidia’s already sky-high valuation. So, why isn’t Wall Street celebrating with another AI-fueled rally?
Nvidia remains the undisputed leader in AI chips. Its Blackwell AI architecture is seeing “the fastest ramp in our company’s history,” with USD 11 billion in sales in its first quarter alone. Tech giants like Microsoft, Amazon, and Meta are continuing their AI arms race, snapping up Nvidia’s chips to power the next generation of artificial intelligence.
But there are signs that competition is creeping in. The emergence of DeepSeek raised concerns about efficiency improvements in AI model training. If powerful AI models can be built with fewer high-performance GPUs, demand for Nvidia’s chips could cool off faster than expected. When DeepSeek made its announcement in January, Nvidia’s stock plunged nearly 17% in one day, wiping out USD 589 billion in market cap.
That said, Nvidia’s CEO Jensen Huang remains extremely bullish, stating: "Demand for Blackwell is amazing as reasoning AI adds another scaling law – increasing compute for training makes models smarter, and increasing compute for long thinking makes the answer smarter”.
One key reason for the market’s lukewarm reaction? Shrinking profit margins. Nvidia’s gross margin fell to 71%, below estimates, and down from 73.5% last quarter.
The culprit? The transition to more complex and costly-to-produce AI chips. Nvidia is spending heavily to ramp up production of its next-gen Blackwell chips, and while revenue is soaring, the higher costs are cutting into profitability. For investors, this raises a critical question: Is Nvidia’s explosive growth sustainable, or are profit margins peaking?
Nvidia’s stock has been on an unstoppable tear the last years. In fact, its latest quarterly sales are bigger than its entire annual revenue from just two years ago. But with the stock already reflecting sky-high growth expectations, investors were hoping for an even bigger beat. Some analysts had anticipated a guidance figure north of USD 45 billion, and while Nvidia delivered strong numbers, it wasn’t the "blowout" some were hoping for.
As a result, the reaction in the stock has been minimal despite record-breaking revenue. This reflects a classic “priced-for-perfection” scenario – when expectations are this high, even strong earnings may not be enough to push shares higher.
Nvidia isn’t just any stock – it’s the bellwether for the entire AI sector. Its results influence investor sentiment around AI stocks like AMD, Broadcom, and Super Micro, as well as the rest of the Magnificent Seven.
One major takeaway from this report? AI demand remains red-hot, but cloud computing giants may be nearing a spending plateau. Some analysts have flagged the risk that Microsoft, Amazon, and Google could scale back AI hardware spending after an initial surge. That said, Nvidia still has huge opportunities ahead:
For those with a long-term view, Nvidia’s dominance in AI is undeniable. But with the stock already reflecting massive growth expectations, new investors might want to be cautious about chasing the AI rally at these levels. As always, the best investment strategy is most often to stay diversified, think long-term, and remember that no stock – even Nvidia – goes up in a straight line.
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