Nvidia, the leading player in the artificial intelligence (AI) revolution, is set to release its fiscal second-quarter operating results on August 28. The company’s adjusted gross margin, a key figure to watch, is expected to decline by 235 to 335 basis points from the previous quarter. This decline, although seemingly small compared to Nvidia’s previous margin expansion, raises concerns about the sustainability of the AI euphoria.
Nvidia’s success has been driven by strong enterprise demand for its H100 graphics processing unit (GPU) and its ability to command higher prices due to AI-GPU scarcity. However, the company now faces challenges from competitors such as Advanced Micro Devices (AMD), which offers AI-GPUs at significantly lower prices. Moreover, Nvidia’s largest customers, including Microsoft, Meta Platforms, Amazon, and Alphabet, are developing their own AI-GPUs, signaling a reduced reliance on Nvidia’s hardware.
Adding to Nvidia’s woes, reports have surfaced about delays in the release of its Blackwell chip due to design flaws and supplier constraints. This delay opens opportunities for competitors like AMD, Samsung, and Huawei to gain market share. As new chips enter the market and Nvidia’s customers opt for in-house solutions, the company’s pricing power is likely to erode, impacting its gross margin.
The decline in Nvidia’s adjusted gross margin is a significant indicator that the AI bubble may be bursting. Throughout history, new technologies and trends with massive addressable markets have experienced early-stage bubble-bursting events. Investors tend to overestimate the potential of these technologies, leading to disappointment and a loss of euphoria. The lack of clear game plans from businesses regarding AI utilization further supports the notion that we are witnessing another bubble.