$NVIDIA Corp(NVDA)$  Summary

    Nvidia Corporation's recent earnings report revealed a significant slowdown in revenue and gross margin growth, resulting in a 7% drop in stock price.

    The company's heavy reliance on data center revenue and concentrated customer base poses risks, especially if major clients reduce spending.

    Nvidia's future growth outlook is bleak, with declining revenue growth and increasing operating expenses, making it difficult to justify its current valuation.

    Despite positive cash flow and share repurchase plans, Nvidia's valuation is expected to drop, making it a poor long-term investment.

Nvidia Corporation building in Taipei, Taiwan.

Nvidia Corporation (NASDAQ: NASDAQ:NVDA) announced its Q2 earnings recently, dropping almost 7% after-hours, wiping out more than like $200 billion of market capitalization. For perspective, that's more than the company's entire valuation just a few years ago. As we'll argue throughout the article, the company's weakening revenue growth, and declining margins, the company is a poor long-term investment.

The company saw a substantial slowdown in both revenue growth and gross margin growth during the second quarter.

The company saw a more than 3% decline in its gross margin as its revenue increase declined to 15% QoQ. As a result, the company's operating income only grew 10% and the company's diluted EPS grew by only 12%. While those growth rates would be great for any other company, they've declined substantially.

The double whammy of slowing revenue and decreasing gross margin we expect will continue in upcoming quarters. As we discussed in our last article, the company has just a handful of core customers, and even they're arguing that they might be spending too much. AI isn't making much money for software companies.

Nvidia Segment Performance

The company's segment performance show how it's almost completely reliant on data center.

Almost 90% of the company's revenue comes from Data Center, which increased 16% QoQ and 154% YoY, showing how it's still driving the vast majority of the company's growth. The company is continuing to see a potential delay in Blackwell, which is now expected to launch by the end of the year. However, the rumor is demand for the company's GPUs remains strong.

However, it's worth highlighting how concentrated the company's largest customers are. Specifically, Microsoft (MSFT), the majority owner of Open AI that also has Azure and Meta Platforms (META) which is spending billions on its Reality Lab ambitions with minimal profits being seen from it. Other major cloud providers like Oracle (ORCL), Amazon (AMZN), and Google (GOOG) are also buying major amounts.

A key thing worth highlighting here is that these are all companies that can afford to spend $10s of billions on something not profitable, and they've effectively highlighted as such, arguing they might even be overspending. However, as they decide it's not worth it, they'll first put pressure on margins, followed by orders.

They can walk back their orders, and we expect the datacenter to slow down dramatically.

The company continues to operate a large gaming division as its second-largest source of revenue. However, it makes up less than 10% of the company's revenue. The business only saw a 16% YoY revenue increase with $2.9 billion in revenue. The company is working to attempt to integrate AI into gaming to increase its moat there.

However, it's facing not only competition from other businesses such as AMD, but it's facing new competition from companies such as Intel that're building GPUs. The business justifies a much lower valuation for Nvidia where it was pre-AI, and while we expect it to continue, it doesn't justify anywhere near the current valuation by itself.