Nvidia Surprises Investors with Strong Results Amid AI Boom

With a market-determining report on the horizon, investors looked to Nvidia‘s (NASDAQ: NVDA) financial results released after the market closed on Wednesday. The chipmaker is seen as a leading indicator in the tech sector and a key player in the ever-growing artificial intelligence (AI) landscape.

Nvidia surpassed expectations with record-breaking results, reinforcing optimism for ongoing growth. Nevertheless, one concerning trend warrants close observation.

Key Financial Highlights

Nvidia’s fiscal 2025 third quarter (ending October 27) set a high benchmark. The company achieved an impressive revenue of $35.1 billion, reflecting a 94% increase compared to the previous year and a 17% rise from the prior quarter. This performance translated to adjusted earnings per share (EPS) of $0.81, which soared 103%.

For perspective, analysts had estimated revenue of $33.13 billion and an EPS of $0.75, meaning Nvidia exceeded expectations significantly.

The impressive results stemmed largely from the data center segment, which continues to lead the company’s growth. This division, which encompasses processors for cloud computing, data centers, and AI, reported revenue climbing 112% year over year, reaching $30.8 billion, driven by strong AI demand.

Despite the soaring revenue, there was a concern regarding a drop in the company’s gross margin, a trend that persisted into Q3. The gross margin stood at 74.6%, down 500 basis points from 75.1% in Q2. CFO Colette Kress attributed this decline to changes in product offerings, shifting from H100 systems to more complex and costly systems. However, the current margin remains well above the average for the last decade.

Data by YCharts.

The revenue growth of 94% was accompanied by a more modest 50% rise in operating expenses, resulting in a substantial increase in net income and fueling the 103% rise in EPS.

Nvidia’s cash reserves have also nearly doubled over the past year, reaching $38.5 billion in cash and marketable securities, a 110% jump. Furthermore, free cash flow increased 138%, totaling $16.8 billion.

Recently, the company provided insights into the upcoming launch of its highly anticipated Blackwell AI architecture, expected to begin shipping in the fourth quarter:

We completed a successful mask change for Blackwell, our next Data Center architecture, that improved production yields. Blackwell production shipments are scheduled to begin in the fourth quarter of fiscal 2025 and will continue to ramp into fiscal 2026… Both Hopper and Blackwell systems have certain supply constraints, and the demand for Blackwell is expected to exceed supply for several quarters in fiscal 2026.

As Nvidia’s fiscal 2026 starts in late January, the comments indicate that, while demand remains robust, supply limitations could affect growth for some time.

Looking Ahead with Caution

Management anticipates sustained growth for the company, projecting fourth-quarter revenue of $37.5 billion, which would represent a notable 70% increase year over year. While this exceeds Wall Street’s estimates of about $37 billion, initial investor reactions were measured, yet enthusiasm soon followed.

The stock reflects considerable growth potential, being priced at roughly 35 times anticipated earnings. This slight premium seems justified given expectations of 121% earnings growth for this year and a further 47% in fiscal 2026.

One area to monitor is Nvidia’s dependence on cloud service providers, which constitute about 50% of its Data Center revenue. This translates to approximately 44% of Nvidia’s total revenue, or $15.4 billion, primarily from major players such as Amazon Web Services, Microsoft‘s Azure Cloud, and Alphabet‘s Google Cloud.

As these cloud providers continue investing in AI infrastructure, it benefits Nvidia significantly, given its strong market share of 98% in data center graphics processing units (GPUs). However, if demand declines for any reason, major cloud providers might cut back on spending, which could place billions in Nvidia’s revenue at risk.

While I strongly believe in AI’s potential and thus Nvidia’s prospects, I remain watchful for any developments that could impact stock performance.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Danny Vena has positions in Alphabet, Amazon, Microsoft, and Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.