Boosted Nvidia Price Targets Are Missing a Key About Long-Term AI Trend

Even though some on Wall Street are nudging their price targets higher by a few dollars, following last night’s earnings report from Nvidia NVDA, we are maintaining our $175 price target and our One rating.

Nvidia’s results topped consensus expectations for its January 2025 quarter, led by the 93% year-over-year increase in its data center business. However, revenue for the quarter did come up short compared to the "whisper numbers" making the rounds on Wall Street.

To us, whisper numbers to the upside reflect over-exuberant expectations that can diminish a top- and bottom-line beat like the one Nvidia delivered, even as it ramped its Blackwell solutions to $11 billion in revenue or 28% of total sales for the quarter.

While the top-line guidance for the current quarter was ahead of the market’s expectation and implied a whopping year-over-year growth of more than 65%, we’re going to see some EPS re-jiggering largely due to Nvidia’s gross margin guidance. The company sees its non-GAAP gross margin falling to 70.6% to 71.0% in the current quarter, down from 73.5% in the January quarter and 75.0% the one before that.

What’s weighing on those margins, at least in the near term, is the continued ramp of Nvidia’s Blackwell solutions. As production matures, Nvidia’s management expects those margins will return to the mid-70s “later this year,” which means that, in the near term, meeting consumer demand trumps cost improvement efforts. Based on capacity constraint comments from Microsoft MSFT, Amazon AMZN, Meta META and Alphabet GOOGL about their cloud/data center businesses, we should not be surprised that Nvidia is focused on meeting that demand in 1H 2025. But that means modestly-lower margins.

That's not what folks were looking for but it's not the worst problem either. It’s also not the first instance of a company being impacted by margin pressure as it ramps up new products.

While there is fodder for the Nvidia bulls and bears, when we reflect on the growing data points that confirm ramping AI adoption in the enterprise, including earnings call comments this week from Workday’s WDAY CEO Carl Eschenbach, the reality is that we are still in the early innings when it comes to AI.

Ramping to meet demand isn’t easy under normal conditions but when there is a sea change underway that drives explosive demand, it’s even more challenging.

If it sounds like we’re inclined to give Nvidia a pass, we are, but only because of rising AI adoption levels and capital spending to expand the digital infrastructure to support it.

We continue to think rising AI adoption across consumers, enterprises and other institutions (including local, state and federal governments) to drive productivity and other efficiencies means we have a multi-year explosion of digital content creation and consumption ahead of us that will pressure data center and network capacity.

Looking past current AI models, more intricate ones are likely to be much like more robust PCs and smartphones compared to their original models — far greater functionality that will require greater computing and processing power as well as energy consumption. That likely roadmap also keeps us bullish on Marvell MRVL, Eaton ETN and Applied Materials AMAT.

In terms of our NVDA price target, rather than assume the margin impact of the Blackwell ramp will be limited to one or two quarters, we’ll look for confirmation margins are getting back on track before revisiting. We will also continue to monitor AI adoption trends as well as monthly data points from Taiwan Semi TSM, Hon Hai and other company comments. That includes what we hear tonight from Dell DELL and HP HPQ about AI PC expectations as well as server demand.

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At the time of publication, TheStreet Pro Portfolio was long NVDA, MSFT, AMZN, META, GOOGL, MRVL, ETN and AMAT.