This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
With shares down more than 10% year to date, Nvidia's (NASDAQ: NVDA) rocket ship rally has hit a roadblock, even as its chip business continues to break records. Fourth-quarter earnings were yet another slam-dunk success -- but instead of celebrating, investors responded by selling the stock. Are Nvidia shareholders tired of winning, or is something deeper at play? Let's explore what the next 12 months could have in store.
Fourth-quarter earnings were another slam dunk
Nvidia investors usually have nothing to fear on earnings day. The company has a long track record of beating expectations, and the fourth quarter for fiscal year 2025, which ended Jan. 26, was no exception. Revenue jumped 78% year over year to $39.3 billion, driven by continued strength in the data center segment, where it sells graphics processing units (GPUs) for running and training AI algorithms. This technology is rapidly evolving, and Nvidia frequently upgrades its offerings to boost growth and keep competition at bay.
The company's latest Blackwell GPUs will be the key to its near-term success. These chips are expensive, with a price tag between $30,000 and $40,000 per unit. However, with significant improvements in speed and energy use compared to previous-generation hardware, they can actually save clients money as they manage AI-related workloads.
According to management, Nvidia has reached full-scale production of Blackwell -- selling $11 billion worth in the fourth quarter mainly to large cloud service providers like Amazon, Microsoft, and Alphabet.
What are some of the risks?
Despite the undeniably strong earnings, Nvidia's shares tanked around 8.5% on earnings day, suggesting many shareholders are getting jittery. The apprehension might be related to guidance. While management expects first-quarter revenue to grow to $43 billion (up 65%), they see gross margins declining from 78% to 70.6% year over year.
Falling margins suggest that competition may be causing Nvidia to lower its prices, which could lead to slower earnings growth. The company faces direct competition from other GPU makers, such as Advanced Micro Devices, which has designed its MI325X to compete with Nvidia's Blackwell GPUs.
However, the most significant risk might be from custom chips.
Custom chips are optimized for specific applications, eliminating unnecessary components and potentially making them cheaper and more energy-efficient than Nvidia's general-purpose GPUs.
While many of Nvidia's clients already use custom chips in small numbers, this trend could grow. In February, OpenAI (the maker of ChatGPT) finalized its design with Taiwan Semiconductor Manufacturing for a custom chip with the goal of mass-producing it next year and reducing reliance on Nvidia. Even if competition doesn't challenge Nvidia's market share, it could hurt its pricing power and margins by making clients more price-sensitive.
Another threat comes from the Chinese start-up DeepSeek, which created a competitive large language model (LLM) using Nvidia's older H800 chips. DeepSeek's achievement could raise questions about whether Nvidia's latest hardware is even necessary.
Don't expect much stock price growth this year
With a market cap of $2.9 trillion, Nvidia has limited potential for stock price growth, even in the best-case scenario. The larger something is, the more force is needed to move it. And while the industry-leading chipmaker will likely enjoy top-line expansion, its margins could face pressure as clients turn to custom chips and reevaluate the amount of money they are pouring into what remains a highly speculative industry.
That said, Nvidia still seems like a decent value. With a forward price-to-earnings (P/E) multiple of just 28, shares are in line with the Nasdaq-100's forward estimate, despite the company's excellent growth rate. This valuation prices in much of Nvidia's potential headwinds, so a big crash looks unlikely, absent deterioration in macroeconomic conditions.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
