NVIDIA’s Earnings Momentum: Sustainable Growth or Looming Correction?

NVIDIA’s explosive growth in AI-driven data center revenue has cemented its status as a market leader, but investors must now grapple with critical questions: Is this momentum sustainable, or are valuation pressures and slowing sequential growth signaling a potential correction?

Earnings Momentum: A Tale of Two Metrics

NVIDIA’s Q2 2025 results underscored its dominance in the AI infrastructure race. Revenue surged to $46.7 billion, a 56% year-over-year increase, with the data center segment contributing $41.1 billion—88% of total revenue [1]. This was fueled by the Blackwell GPU’s adoption in AI training and inference, alongside robust demand for Hopper and H200 GPUs [3]. Gross margins remained resilient at 72.4% (GAAP), reflecting the high-margin nature of data center sales [1].

However, sequential growth—a critical barometer for sustainability—has shown signs of moderation. While Q2 revenue rose 6% from Q1, this marked a sharp deceleration from the 17% sequential growth in Q3 FY2025 and 12% in Q4 FY2025 [1]. The Gaming segment, which saw a 14% sequential increase in Q2, also faces headwinds from a $4.5 billion H20 inventory charge in Q1, which temporarily distorted margins [2].

Industry Tailwinds vs. Valuation Headwinds

The AI data center market is expanding at an unprecedented pace. NVIDIA’s CFO, Colette Kress, estimates that global AI infrastructure investments will double to over $1 trillion in the next two years [1]. Analysts project data center revenue could reach $200–$300 billion by 2026, driven by hyperscalers and enterprises [4]. This growth narrative has justified NVIDIA’s forward P/E of 33.43X, a premium to the sector average [2].

Yet, the valuation math is becoming precarious. At 33.43X, NVIDIA trades at a 38% premium to the S&P 500 Tech sector average of 24.1X [2]. While 34 of 38 analysts maintain “Buy” ratings, price targets have been raised to $200–$220, reflecting optimism about Blackwell adoption [4]. However, discounted cash flow models suggest the stock may be overvalued if growth slows below 40% annually [5].

Risks on the Horizon

Three key risks could disrupt NVIDIA’s trajectory:
1. Geopolitical Constraints: U.S. export restrictions have already curtailed H20 sales to China, a market representing 50% of global AI researchers [1]. Alibaba’s development of homegrown AI chips further threatens NVIDIA’s dominance in the region [5].
2. Competition and Commodity Pressures: AMD and Chinese startups like Cambricon are closing the performance gap, while cloud providers increasingly adopt custom ASICs [3]. This could erode NVIDIA’s pricing power over time.
3. Margin Vulnerabilities: While gross margins remain strong, rising R&D costs (expected to hit $15 billion in FY2026) and potential supply chain bottlenecks pose risks [1].

Conclusion: A High-Stakes Balancing Act

NVIDIA’s earnings momentum is underpinned by its leadership in AI infrastructure and a $1 trillion market tailwind. However, the moderation in sequential growth and valuation premiums demand caution. For investors with a 3–5 year horizon, the stock remains compelling if the company maintains its R&D edge and navigates geopolitical risks. Yet, those wary of overvaluation or macroeconomic shifts may find the risks outweigh the rewards.

As Jensen Huang noted in the Q2 earnings call, “The world is building the next AI era, and NVIDIA is at the center.” But in a race where the finish line keeps moving, the question is whether the company can keep accelerating—or if the market is already pricing in a future that may not materialize.

Source:
[1] NVIDIA Announces Financial Results for Second Quarter Fiscal 2026 [https://nvidianews.nvidia.com/news/nvidia-announces-financial-results-for-second-quarter-fiscal-2026]
[2] Should You Buy, Sell or Hold NVIDIA Stock Post Strong Q2 [https://www.nasdaq.com/articles/should-you-buy-sell-or-hold-nvidia-stock-post-strong-q2-earnings]
[3] Earnings call transcript: NVIDIA Q2 2025 [https://www.investing.com/news/transcripts/earnings-call-transcript-nvidia-q2-2025-strong-earnings-beat-drives-stock-uptick-93CH-4213615]
[4] Nvidia's Explosive Growth in AI and Data Center Demand [https://www.ainvest.com/news/nvidia-explosive-growth-ai-data-center-demand-valuation-justified-2508]
[5] Evaluating NVIDIA's Value After Q2 Earnings and China's AI [https://finance.yahoo.com/news/evaluating-nvidia-value-q2-earnings-100803494.html]