Nvidia’s recent Q3 earnings report certainly raises some interesting questions. On one hand, the company posted $35.1 billion in revenue, a 94% year-over-year growth, and exceeded analyst expectations in earnings. But the stock has dropped by around 3.1% since the announcement, which signals that investors might be questioning whether the company’s meteoric rise can continue at the same pace.
From a financial perspective, Nvidia continues to dominate the AI sector, powering the infrastructure of major players like Microsoft, Google, and Meta. Its data center revenue soared 112% year-over-year, reaching $30.8 billion. However, the growth isn’t as straightforward as it seems. There are underlying challenges that the company will need to navigate.
One major development is the launch of Nvidia’s Blackwell GPUs. These chips offer a remarkable efficiency boost—64 Blackwell GPUs reportedly match the performance of 256 H100 GPUs, which could reduce AI infrastructure costs by as much as 75%. While this sounds impressive for customers, it presents a double-edged sword for Nvidia. If clients need fewer GPUs to achieve the same results, Nvidia’s hardware sales—which still make up the vast majority of its revenue—could be at risk. With software contributing just 1.3% of its trailing 12-month revenue, Nvidia’s heavy reliance on hardware sales is a potential vulnerability.
Another concern for investors is scale. Nvidia’s trailing 12-month revenue has now surpassed $113 billion, and this makes it increasingly difficult to sustain the triple-digit growth rates that have driven its stock price up in the past. While Q4 guidance of $37.5 billion suggests continued growth, the pace is undeniably slowing down. The company’s longer-term projections hinge on GPU compute demand nearly quadrupling by FY26—a goal that might be too ambitious, especially if the efficiency gains from Blackwell’s chips mean that fewer GPUs are needed overall. Smaller companies, in particular, may not require as much hardware, which limits Nvidia’s total addressable market and future growth potential.
From a valuation standpoint, Nvidia is trading at a forward P/E ratio of 53, more than twice the industry median. This high valuation suggests that investors are confident in Nvidia’s ability to continue its growth trajectory, but with potential challenges on the horizon—like the slowing demand for GPUs and its underdeveloped software business—some analysts believe a re-rating closer to industry norms is not out of the question. If that happens, Nvidia could face significant downside risk.
Nvidia’s reliance on a handful of customers also raises a red flag. Three hyperscalers account for a staggering 36% of Nvidia’s revenue. While these companies continue to pour money into AI infrastructure, having such concentrated revenue streams could become problematic as the market matures, and any slowdown in AI investment could directly impact Nvidia’s bottom line.
So, where does this leave us? Nvidia is undeniably a leader in the AI and GPU space. But with the launch of Blackwell GPUs, the company faces a new set of challenges that could make sustaining its explosive growth more difficult. If software revenue doesn’t ramp up quickly, and demand for hardware begins to slow due to increased efficiency in its chips, Nvidia might struggle to maintain its current pace. The company is still impressive, but the stock’s valuation might not justify the risks ahead.