Are These 2 Things Warning Signs for Nvidia Investors?

Nvidia (NASDAQ: NVDA) has wowed investors continuously with its earnings growth, and that's led to a soaring share price. The stock has climbed 2,500% over five years and is heading for a 140% gain this year. The reason for such performance is simple. Nvidia has become a giant in one of today's highest-growth businesses: artificial intelligence (AI). The tech powerhouse dominates the AI chip market, with 80% share, and offers customers a full suite of AI products and services.

All of this has translated into growth, helping Nvidia report record revenue quarter after quarter and surpass analysts' earnings estimates. That was the case in the most recent quarter, as revenue reached $30 billion -- that's more than the company's full-year revenue as recently as the 2023 fiscal year. Demand continues to soar for Nvidia's products, and the company is even about to launch its new architecture, Blackwell, in the coming months.

Still, two things in Nvidia's latest report weren't as bright as the rest of the picture. Are they warning signs for Nvidia investors? Let's find out.

Image source: Getty Images.

Nvidia's GPUs

First, a bit of background on Nvidia and its path so far. Over the years, Nvidia transitioned from developing graphics processing units (GPUs) to power video games and expanded the use of these powerful chips into other industries. And one of these other industries is AI. Today, Nvidia's GPUs are most sought-after for many crucial AI tasks, such as the training and inferencing of large language models. This has helped the company's earnings and share performance to explode -- and has made it one of investors' favorite technology stocks.

Now, let's get to the two items in Nvidia's recent earnings report that may cause concern. The company maintained its track record of triple-digit revenue growth, but the pace slowed compared to previous quarters. Nvidia achieved revenue growth of more than 200% over the three earlier quarters year over year -- in the most recent period, though, growth slowed to 122%. And Nvidia's outlook for the next quarter would represent growth of 79% from the year-earlier period.

The second point to consider is the company's gross margin , which came in at about 75%. This level is fantastic -- but it's lower than last quarter's 78.4% gross margin.

If we look at these elements alone, we might wonder if Nvidia's spectacular growth is finally slowing down. Such a potential slowdown could lead to a drop in the share price, especially considering the stock's valuation today. Nvidia trades for roughly 40 times forward earnings estimates .

The story behind the numbers

But before hitting the sell button or turning our backs on Nvidia, let's consider the reason behind Nvidia's slower growth and lower gross margin in the recent quarter. Starting with revenue, it's important to note that comparison periods are getting more and more difficult for Nvidia -- that's because we're now comparing to a time just one year ago when major customers were already pouring investment into Nvidia GPUs. Prior to that point, investment in AI was lower, offering Nvidia much more room to deliver explosive growth.

That said, Nvidia continues to expand its offerings -- for example, in the area of enterprise AI -- and pledges to update its GPUs on an annual basis. All of this should keep the company in its leadership position and maintain high levels of growth.

As for gross margin, I would expect to see some fluctuation at a time like right now as Nvidia prepares to ramp up Blackwell's production. The costs of launching a new product and the process of ramping are weighing on margin at the moment. But even in this context, Nvidia has forecast gross margin of 75% for the upcoming quarter and around that level for the full year -- and all of this is well above the company's profit margin over time.

NVDA Gross Profit Margin (Quarterly) data by YCharts

Should Nvidia investors worry?

So let's get back to our question: Are Nvidia's slowing revenue growth and lower gross margin figure warning signs for investors? Not at all. They don't represent a decline in demand or a weakening of Nvidia's ability to generate profit from its products and services.

Instead, they reflect where Nvidia is at right now: The company may have passed the initial boom -- the time when customers just began pouring investment into AI -- but the growth story has plenty of chapters ahead. Customers continue to prioritize AI spending, and Nvidia aims to roll out major new products on a regular basis and gain efficiency as it produces these products at scale. All of this signals plenty of growth ahead, offering Nvidia investors reason to be optimistic.

Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy .