NVIDIA’s Earnings Crossroads: Margin Pressures and the AI Market’s Hidden Risks

The AI revolution has thrust NVIDIA into the spotlight as the undisputed king of AI infrastructure. Yet, beneath its roaring revenue growth lies a critical vulnerability: shrinking gross margins and intensifying competition. As investors await NVIDIA’s May 28 earnings report, the question is clear: Can the company sustain its pricing power—or is this the turning point for a valuation reset?

The Margin Story: From Dominance to Decline

NVIDIA’s Q1 FY25 gross margins hit 78.4% (GAAP), a record high fueled by surging data center sales for AI chips like the H100. But the honeymoon period is fading. By Q4 FY25, margins had already dipped to 73% (non-GAAP), with further declines forecasted to 70.6% for Q1 FY26. This erosion isn’t just a hiccup—it’s a systemic challenge.

The culprit? Blackwell architecture costs. NVIDIA’s next-gen AI chips, designed for trillion-parameter models, are far more complex—and costly—to produce. Meanwhile, competitors like AMD (with its MI300X) and China’s Baidu/Alibaba are accelerating internal AI-GPU development. These moves by the “Magnificent Seven” (major cloud providers) threaten NVIDIA’s stranglehold on GPU scarcity.

The Contrarian Case: Why NVIDIA’s Crown Is at Risk

1. Customer Autonomy: The End of GPU Dependence?

Major clients like Microsoft, Google, and Amazon are no longer passive buyers. They’re now designing custom AI chips (e.g., Google’s TPU v5, Amazon’s Trainium 2) to reduce reliance on NVIDIA. This shift, combined with China’s aggressive push for domestic alternatives, could erode NVIDIA’s pricing leverage.

2. AMD’s Stealth Attack

AMD’s MI300X and its integration of CPU and GPU (a “chiplet” design) offer a cost-effective alternative. While NVIDIA’s H100 still outperforms for training, AMD’s chips are 30% cheaper for inference tasks—a critical battleground for cloud providers.

3. The China Factor

U.S. export controls have kneecapped NVIDIA’s China sales, but the real threat is Beijing’s $15 billion AI chip fund. Companies like Horizon Robotics and BAIKAL are advancing rapidly, backed by state support. Even without sanctions, China’s AI infrastructure could soon bypass NVIDIA.

4. Blackwell’s Double-Edged Sword

While Blackwell sales are booming (contributing $11B in Q4 FY25), its high production costs are squeezing margins. NVIDIA admits these margins will stay low until 2026 as it ramps up output. Investors must ask: Is the revenue growth worth the margin hit?

May 28: The Earnings Stress Test

This quarter’s report will reveal whether NVIDIA can stabilize margins or if the decline accelerates. Watch for two red flags:
1. Data Center Revenue Growth: If Blackwell sales miss expectations, it signals overestimation of AI’s compute needs.
2. Margin Guidance: A further drop below 70% could trigger panic selling, especially if competitors like AMD steal market share.

Historical backtests reveal that a buy-and-hold strategy triggered on earnings announcement dates averaged 12.77% returns over 30 days—yet carried a maximum drawdown of -38.02%, underscoring its high-risk profile. While the absolute returns are compelling, the strategy’s low Sharpe Ratio (0.07) highlights volatile performance. This suggests traders could capture post-earnings momentum, but must brace for significant downside risk—a critical consideration given the margin pressures outlined above.

Why Bulls Are Missing the Bigger Picture

Bullish narratives focus on NVIDIA’s AI software ecosystem (CUDA, DGX Cloud) and partnerships with automakers like Toyota. But software alone can’t offset hardware margin erosion. The real risk? Overvaluation in a frothy AI market.

NVIDIA’s P/E ratio is 54x, nearly double its five-year average. If May’s results disappoint, this premium could vanish fast. The market’s faith in “NVIDIA = AI” is a bubble waiting to pop—if the earnings don’t justify it.

Investment Implications: Proceed with Caution

• Short-term traders: Consider shorting ahead of earnings if margin guidance weakens.
• Long-term investors: Wait for a pullback to 300–350 (down from $450+) before accumulating.
• Competitor plays: AMD’s stock (AMD) is a direct beneficiary of NVIDIA’s margin struggles.

Final Take

NVIDIA’s AI dominance isn’t in doubt—its tech is unmatched today. But the company’s future hinges on whether it can navigate rising costs, customer independence, and global competition. May 28’s earnings will be the litmus test. For contrarians, this is the moment to ask: Is NVIDIA’s margin trajectory worth its current valuation—or is this the start of a reckoning?

The AI hype train may have more stops, but investors ignoring margin math risk being left stranded at the next derailment.

The time to reassess NVIDIA’s risks is now.