Shares of Nvidia (NASDAQ: NVDA) were heading lower Thursday after the AI chip leader posted better-than-expected results in its fiscal 2025 second-quarter report after the close Wednesday, but the company's beat was not as wide as investors had become used to and management's guidance was on the lighter side. Nvidia also reported a sequential decline in gross margin, indicating that it may have reached the limits of its margin expansion.
The stock was down by 6.4% as of 3:14 p.m. ET, though many of its AI peers such as Arm Holdings rose, suggesting that some investors were interpreting the report as good news for AI demand broadly, and taking the opportunity to rotate into other AI stocks with more upside.
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Nvidia plays the expectations game
Nvidia delivered another strong quarter: For the period that ended July 28, revenue was up by 122% year over year to $30 billion and adjusted earnings per share soared by 152% to $0.68, both of which beat analysts' consensus estimates.
However, its gross margin slipped from 78.4% to 75.1%, which the company blamed on new data center products and inventory write-downs related to the Blackwell platform. It was the first time that Nvidia's gross margin had shrunk in the generative AI era, and it seems to be a sign that its margin expansion has probably peaked.
Nvidia's fiscal third-quarter guidance also seemed a bit underwhelming. Management forecast revenue of $32.5 billion, and while that was ahead of the consensus figure of $31.8 billion, it would amount to just 8% sequential revenue growth.
The company expects to launch its Blackwell platform in fiscal Q4, and that could be causing a modest headwind to Q3 demand.
Should you buy the dip in Nvidia?
It makes sense for Nvidia stock to take a breather. After all, it's up by nearly 1,000% since the start of 2023, shortly after ChatGPT was launched.
It now has a market cap of $3 trillion, just behind Apple and Microsoft in the race for the title of the most valuable company in the world, and the expected soaring growth it will experience from AI, at least over the next few quarters, is largely baked into its stock price. It trades at a forward P/E ratio of 43, which is expensive, but reasonable.
Thursday's pullback seems like a good opportunity for long-term investors to scoop up shares of Nvidia, as the company still dominates the AI hardware landscape. However, investors may also want to take a cue from those who are rotating out of the stock into AI alternatives like Arm Holdings.
With its $3 trillion valuation, Nvidia's upside potential is more limited than that of companies like Arm, especially with its gross margin falling and its sequential growth decelerating.
Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy .
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