3 Subtle Warning Signs Investors Might Have Missed in Nvidia’s Earnings Results

giant semiconductor nvidia (NVDA -0.09%) Excellent results for the first quarter of fiscal 2025 (ended April 28, 2024). Revenues and revenue easily topped Wall Street consensus estimates. The company’s booming artificial intelligence (AI)-based data center segment was the main reason for this outstanding performance. Data center revenue in the first quarter increased 427% year-over-year to $22.6 billion.

Due to the rapid advancement and adoption of generative AI technologies, Nvidia’s GPUs (H100 chips based on Hopper architecture) are being widely used by cloud service providers, enterprises, startups, and even sovereign governments to train and infer large-scale language models. The traditional $1 trillion global data center infrastructure based on “dumb” network interface cards (NICs) and central processing units (CPUs) is being converted to accelerated computing. Enterprises are also preparing to transition from their H100 GPU-based accelerated computing infrastructure to one based on the superior H200 chips and next-generation Blackwell systems. All of these tailwinds bode very well for Nvidia’s financial and stock price performance in the coming months.

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

Nvidia’s first quarter results were undoubtedly positive, but investors should be aware of some potential challenges before picking this stock.

competitive pressure

It’s no secret that Nvidia’s meteoric rise in market share stems directly from its sheer dominance in the AI ​​hardware market. However, Nvidia has been battling H100 chip supply issues for months. The company also expects demand for its new H200 chips and next-generation Blackwell systems to outpace supply by next year.

Against this background, advanced micro devices‘ MI300X GPU and entry intelThe Gaudi 3 AI accelerator could hurt Nvidia’s AI chip market share, at least in the short term. Nvidia’s recently released chips may have superior compute performance, but the MI300X and Gaudi 3 are more cost-effective for running AI workloads. Nvidia may also have to face competition from cloud companies such as: alphabet and Amazonis developing its own AI chips and custom solutions for specific workloads.

Nvidia must quickly ramp up AI chip production to avoid a significant loss of market share. Additionally, because cloud service providers and hyperscalers require large quantities of AI chips and are very price sensitive, Nvidia may need to significantly lower the price point of its AI chips to remain competitive. As the AI ​​market matures and workloads become standardized, Nvidia may face increased competition from low-cost custom AI solutions.

These challenges could impact Nvidia’s revenue and earnings performance in the coming months.

geopolitical tensions

In September 2022, the U.S. government banned the export of Nvidia’s high-performance AI chips to China. Since then, export restrictions have continued to tighten and now also include the slightly slower A800 and H800 chips.

Nvidia has developed new products that do not require export control licenses, but these restrictions have had a significant impact on the company’s China data center revenue. NVIDIA expects the Chinese market to become more competitive in terms of price and market share.

The U.S. government also slowed shipments of Nvidia 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 aging

Nvidia has accelerated the pace of new chip releases from two years to one year to fend off competition. However, this strategy may result in the company cannibalizing its existing product lineup with next-generation products. Because customers are so intent on optimizing their AI infrastructure, they may delay purchases to gain access to 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.

So while the warnings in the company’s report card can’t be completely ignored, there’s no need for investors to write off Nvidia entirely. The company’s full-stack approach to accelerated computing (advanced AI chips, AI-optimized networking solutions, CUDA software ecosystem), flexible architecture (Hopper, Grace, Blackwell), and commitment to innovation were clear differentiators. Considering this is highly disruptive to the AI ​​industry, investors may want to consider purchasing at least a stake in this stock even at its current high price levels.