Nvidia’s Stock Drops Following Q3 Earnings

While key metrics exceeded expectations, investors appeared disappointed by a decline in gross margins and the company’s guidance on revenue, fuelling concerns over slowing growth.

However, this week’s drop in Nvidia’s shares took it to second place, though it still has a market valuation of $3.38 trillion, as Apple re-gained the top spot with a valuation of $3.57 trillion.

Source: Koyﬁn

Another worrisome factor that has weighed on Nvidia’s stock over the past week is concerns about the potential impact of restrictions that the US is expected to announce aimed at limiting China’s access to chips.

The exact impact of the tariffs on Nvidia is unclear. However, new tariffs would indeed raise barriers

to trade and most likely cause problems for Nvidia’s supply chain.

As a result of these potential restrictions, they are shifting to later orders, implying some of them won’t be reﬂected in the current quarter. Nvidia’s next-generation Blackwell chips won’t go on sale until early next year.

The growing skepticism around the slowing rate of growth, increased competition, and the concern that investors are probably going to get less bang for their buck.

However, trading at a lofty valuation of nearly 34x consensus FY2025 earnings, future gains could be harder to come by for Nvidia stock.

Nvidia’s biggest customers in terms of capex spending — Amazon, Microsoft and Alphabet — are looking to reduce their reliance on, and even possibly replace, Nvidia chips.

Lower AI Training May Hurt Nvidia

Companies have devoted immense resources to building AI models and these models have been getting steadily larger in terms of the number of parameters, a key measure of model size and complexity.

Source: BlackRock

Training these massive models is more of a one-time affair that requires considerable computing power and Nvidia has been the biggest beneﬁciary of this, as its GPUs are regarded as the fastest and most efficient for these tasks.

This is very evident from Nvidia’s revenue growth trajectory. Sales are on track to grow from $27 billion in ﬁscal year 2023 to almost $130 billion in this year.

As the models increase in size, accuracy, and performance, diminishing returns might set in. This could result in clients rethinking their capital expenditures.

Another factor that might slow down AI training is the potential limitation in the availability of high-

quality data, which could become a signiﬁcant challenge for training large language models.

Much of the high-quality text and other content that’s available readily on the Internet has likely already been internalized by these general-purpose AI models, limiting easy opportunities for further model expansion. This could push companies away from brute-force scaling.

There’s a possibility that companies will shift toward smaller, specialized models tailored to speciﬁc organizations or tasks, and this could impact demand for Nvidia’s high-powered GPUs. This could mean that the big boom Nvidia saw over the last three years was front-loaded.

While Nvidia shares are up over 180% year-to-date the stock outpacing the heavy tech Nasdaq index, which is up only 40% for the same period.

Investors can long Nvidia using our 2x NVIDIA, 3x NVIDIA.

Alternatively, traders can short Nvidia using our -1x NVIDIA, -3x NVIDIA.

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