Has NVIDIA's Gross Margin Collapsed in Q4 Earnings? Two Warning Signs Deserve Attention

TradingKey

AuthorPetar Petrov

Feb 27, 2025 8:00 AM

TradingKey - Nvidia posted a strong set of results as it was able to beat the estimates for both revenue and earnings per share. However, the stock slightly fell down 1.5% during the after-market hours:

Revenue: $39.33 billion vs. $38.05 billion estimated (+78% yoy)
EPS: $0.89 adjusted vs. $0.84 estimated (+82% yoy)
Next Quarter Revenue: $43.00 billion (± 2%) vs. $41.78 billion expected (+65% yoy)

The main revenue segment of Nvidia, Data Centers (representing 90% of the total revenue), reported $35.6 billion in revenue, 93% higher yoy, and above the estimated $33.65 billion. The revenue from the newest product Blackwell was approximately $11 billion – a truly impressive number, considering the fact that the product was introduced less than a year ago.

Regarding DeepSeek, Huang expressed that the current opportunities in AI are in the very early stage, and it is unlikely that the demand for Nvidia products will significantly slow down because AI models are becoming increasingly cost-efficient.

However, two aspects may cause a concern for investors:

Gross Margin: The gross margin has decreased to 73%. It was 74.6% in the previous quarter and 76.7% a year ago. The margin is expected to inch down to 70.6% next quarter. New products are more complex and costlier to produce, driving the gross margin down. This decline might also suggest limited pricing power against major customers.
Accounts Receivable: Another concern is the increase in accounts receivable from $10 billion to $23 billion over the past year. This negatively impacts free cash flow as clients are slow to pay Nvidia.

Overall, Nvidia growth remains robust driven by solid demand for Blackwell. Currently, Nvidia is trading at a PE ratio of around 44x, and with expected growth of over 60%, the valuation looks attractive.

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