One analyst thinks Nvidia Corp. investors should focus on profit margins rather than Wall Street’s fears about lesser AI infrastructure spending.
In a client note, BofA analyst Vivek Arya called attention to Nvidia’s (NVDA) gross profit margins and their recovery as a crucial to a stock resurgence.
“Nvidia’s stock peaked last year (June) right around the time gross margins peaked around 79% in the Hopper product cycle,” he said. “In hindsight 79% was an abnormally high number,” but mid-70% gross margins may be “closer to trend.”
The shift to Nvidia’s new Blackwell product line lowered its gross margin to 73% of revenue in the last quarter.
Nvidia shares surged 6.4% on Wednesday, recovering from Monday’s market crash. These shares are down about 15% this year.
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He stated that Nvidia’s rollout of its more complex next-generation Blackwell platform required major system design modifications, but future adjustments will be easier. He expects its gross margins to drop in the fiscal first quarter, which ends in April, and rise to the mid-70% level in the second half.
Arya maintained a buy rating and $200 price target on Nvidia. Despite rising competition from application-specific integrated circuits (ASICs) from Broadcom Inc. (AVGO), he believes the company can maintain an 80% to 85% market share for AI server chips.
Arya said Nvidia’s GTC presentation next week will focus on its product pipeline. He expects the company to “present attractive, albeit well-expected” upgrades on its Blackwell Ultra and Rubin product families. Additionally, the company is intended to promote autonomous automobiles and quantum computing’s long-term potential.
