3 Subtle Warning Signals from Nvidia’s Earnings Results That Investors Likely Missed | The Motley Fool

Semiconductor giant Nvidia (NVDA -0.09%) came out with stellar results for the first quarter of fiscal 2025 (ending April 28, 2024), with revenue and earnings easily beating the Wall Street consensus estimates. The company’s booming artificial intelligence (AI)-powered data center segment has been the main reason for this exceptional performance. Data center revenue was up by 427% year over year to $22.6 billion in the first quarter.

With the rapid advancement and adoption of generative AI technologies, cloud service providers, enterprises, start-ups, and even sovereign governments are using Nvidia’s GPUs (Hopper architecture-based H100 chips) extensively for training and inferencing large language models. The existing trillion-dollar global data center infrastructure, based on “dumb” network interface cards (NICs) and central processing units (CPUs), is being transitioned to accelerated computing. Enterprises are also gearing up to transition their H100 GPU-based accelerated computing infrastructure to that based on the superior H200 chip and the next-generation Blackwell systems. All these tailwinds bode extremely well for Nvidia’s financial and share price performance in the coming months.

On May 22, Nvidia announced a 10-for-1 stock split, effective June 10, 2024. Although the split does not change a company’s fundamental story or growth prospects, it makes the stock more accessible to a broader base of retail investors.

While Nvidia’s first-quarter results were undoubtedly positive, investors should know some potential challenges before picking this stock.

Competitive pressures

It is no secret that Nvidia’s rapid share gains directly resulted from its complete dominance in the AI hardware market. However, Nvidia has been battling supply challenges for its H100 chip for several months. The company also expects demand for its new H200 chip and next-generation Blackwell system to outpace supply until the next year.

In this backdrop, the ramp-up of Advanced Micro Devices‘ MI300X GPUs and the entry of Intel‘s Gaudi 3 AI accelerator may put a dent in Nvidia’s AI chip market share at least in the short run. Although Nvidia’s recently launched chips may be superior in computing power, MI300X and Gaudi 3 are more cost-effective in running AI workloads. Nvidia may also have to face competition from cloud companies such as Alphabet and Amazon, which are developing in-house AI chips and custom solutions for specific workloads.

Nvidia has to rapidly ramp up production of its AI chips to prevent a significant loss in market share. Furthermore, since cloud service providers and hyperscalers require a large amount of AI chips and are highly price sensitive, Nvidia may also have to significantly reduce the price point of its AI chips to remain competitive. As the AI market matures and workloads get standardized, Nvidia may also face increasing competition from low-cost targeted custom AI solutions.

These challenges can affect Nvidia’s revenue and earnings performance in the coming months.

Geopolitical tensions

In September 2022, the U.S. government banned Nvidia from exporting its high-performance AI chips to China. Since then, the export restrictions continued to mount and now also include the slightly slowed-down A800 and H800 chips.

While Nvidia developed new products that do not require export control license, these restrictions have significantly affected the company’s data center revenue in China. Nvidia expects the Chinese market to be more competitive in terms of pricing and share.

The U.S. government has also slowed shipments of Nvidia’s AI chips to the Middle East, including the United Arab Emirates and Saudi Arabia.

These export restrictions are detrimental to the company’s international market growth in the coming months.

Product obsolescence

Nvidia accelerated the pace of the new chip launch from two years to one year to fend off competition. However, this strategy can also result in the company cannibalizing its older product lineup with next-generation products. Since customers are keen on optimizing their AI infrastructure, they may opt to delay their purchases to access the latest technology.

Nvidia is trading at a forward price-to-earnings (P/E) ratio of 36.7, which is lower than the company’s three-year average forward P/E multiple of 91.

Hence, although the warnings in the company’s transcript cannot be fully ignored, investors do not need to completely write off Nvidia. The company’s full-stack approach to accelerated computing (advanced AI chips, AI-optimized networking solutions, CUDA software ecosystem), flexible architectures (Hopper, Grace, Blackwell), and commitment to innovation have been solid differentiators. Considering that it has proved to be a major disruptive force in the AI industry, investors can consider buying at least a small stake in this stock — even at current elevated price levels.