Nvidia earnings beat estimates—so why is Wall Street hesitant

Key points:

• Nvidia exceeded expectations with record-breaking revenue and strong guidance, but the stock reaction was muted as Wall Street had hoped for an even bigger beat.
• Gross margin fell to 71%, below estimates, as Nvidia ramps up production of its next-gen AI chips—raising concerns about profitability despite booming sales.
• Nvidia remains the AI market leader, but rising competition (DeepSeek), potential cloud spending slowdowns, and sky-high expectations mean investors should brace for volatility.

Nvidia just dropped its latest earnings, and the numbers are nothing short of massive. In the fourth quarter, the AI chip giant posted:

• Revenue of USD 39.3 billion, up 78% from a year ago, and well above the USD 38.1 billion expected by analysts.
• Net income of a staggering USD 22.1 billion, beating expectations of USD 19.8 billion.
• Guidance for the next quarter was also strong, with Nvidia forecasting USD 43 billion in revenue, slightly ahead of the USD 42.1 billion Wall Street expected.

But despite these stellar results, the stock traded in a narrow range of -2% to +2% in after-hours trading, as investors wrestled with whether the numbers were impressive enough to justify Nvidia’s already sky-high valuation. So, why isn’t Wall Street celebrating with another AI-fueled rally?

AI gold rush: Nvidia still leads, but competition is rising

Nvidia remains the undisputed leader in AI chips. Its Blackwell AI architecture is seeing “the fastest ramp in our company’s history,” with USD 11 billion in sales in its first quarter alone. Tech giants like Microsoft, Amazon, and Meta are continuing their AI arms race, snapping up Nvidia’s chips to power the next generation of artificial intelligence.

But there are signs that competition is creeping in. The emergence of DeepSeek raised concerns about efficiency improvements in AI model training. If powerful AI models can be built with fewer high-performance GPUs, demand for Nvidia’s chips could cool off faster than expected. When DeepSeek made its announcement in January, Nvidia’s stock plunged nearly 17% in one day, wiping out USD 589 billion in market cap.

That said, Nvidia’s CEO Jensen Huang remains extremely bullish, stating: "Demand for Blackwell is amazing as reasoning AI adds another scaling law – increasing compute for training makes models smarter, and increasing compute for long thinking makes the answer smarter”.

Margins under pressure

One key reason for the market’s lukewarm reaction? Shrinking profit margins. Nvidia’s gross margin fell to 71%, below estimates, and down from 73.5% last quarter.

The culprit? The transition to more complex and costly-to-produce AI chips. Nvidia is spending heavily to ramp up production of its next-gen Blackwell chips, and while revenue is soaring, the higher costs are cutting into profitability. For investors, this raises a critical question: Is Nvidia’s explosive growth sustainable, or are profit margins peaking?

Market reaction: high expectations, higher risks

Nvidia’s stock has been on an unstoppable tear the last years. In fact, its latest quarterly sales are bigger than its entire annual revenue from just two years ago. But with the stock already reflecting sky-high growth expectations, investors were hoping for an even bigger beat. Some analysts had anticipated a guidance figure north of USD 45 billion, and while Nvidia delivered strong numbers, it wasn’t the "blowout" some were hoping for.

As a result, the reaction in the stock has been minimal despite record-breaking revenue. This reflects a classic “priced-for-perfection” scenario – when expectations are this high, even strong earnings may not be enough to push shares higher.

The AI trade: what’s next for Nvidia and the market?

Nvidia isn’t just any stock – it’s the bellwether for the entire AI sector. Its results influence investor sentiment around AI stocks like AMD, Broadcom, and Super Micro, as well as the rest of the Magnificent Seven.

One major takeaway from this report? AI demand remains red-hot, but cloud computing giants may be nearing a spending plateau. Some analysts have flagged the risk that Microsoft, Amazon, and Google could scale back AI hardware spending after an initial surge. That said, Nvidia still has huge opportunities ahead:

• AI is still in its infancy: Industries like healthcare, finance, and autonomous driving are just beginning to tap into AI’s full potential, which could sustain demand for Nvidia’s chips well into the future.
• New product cycles drive fresh demand: The next generation of Rubin AI chips, expected in 2026, could unlock another wave of revenue growth.

Key takeaways for investors

1. AI demand remains incredibly strong, but concerns about efficiency improvements (DeepSeek) and slowing cloud spending could weigh on Nvidia’s long-term growth.
2. Margins are under pressure, with gross margin falling to 71%, as Nvidia spends more to push cutting-edge AI chips to market.
3. The stock is priced for perfection – while growth is massive, any sign of slowing demand or weaker-than-expected guidance can send shares lower.
4. Nvidia remains the AI market leader, and for long-term investors who believe in AI’s future, any dip could be an opportunity.

For those with a long-term view, Nvidia’s dominance in AI is undeniable. But with the stock already reflecting massive growth expectations, new investors might want to be cautious about chasing the AI rally at these levels. As always, the best investment strategy is most often to stay diversified, think long-term, and remember that no stock – even Nvidia – goes up in a straight line.