Nvidia’s Blockbuster Earnings: Here’s the Biggest Risk the AI Chipmaker Faces, Even as Sales Soar

Listen to the audio version of this article (generated by AI).

Nvidia (NVDA) reported strong earnings on Wednesday. In its latest quarter, the artificial intelligence (“AI”) chipmaker grew sales an astonishing 106% year over year to $96.2 billion, while operating income surged 124% to $63.7 billion.

Nvidia puts up numbers each quarter that seem impossible to fathom. And the fact that a $5 trillion company can grow this much is something special.

While any company would love numbers like that, investors are always looking ahead, and some believe things can’t get any rosier for Nvidia than what they’re seeing now. That’s a big reason why we’ve seen the stock plateau in recent months.

The upshot is that Nvidia is losing some levers that have kept its massive profit machine growing at the pace it has sustained over the past few years. At the same time, its willingness to finance massive projects is swelling its own balance sheet, even as hyperscalers are borrowing billions to buy its chips – both of which call into question the ongoing sustainability of Nvidia’s tremendous sales growth.

For example, even as sales have exploded higher, Nvidia’s gross margin has seemed to top out.

Gross margin appears stuck at 75% and seemingly unable to expand above that level. So, future profit growth will rely primarily on sales growth, without the added lift of gross margin expansion.

Nvidia has already warned that surging memory costs are hitting margins, likely pushing them to 71% to 72% in the fourth quarter. Next year, however, they should bounce back to margins of 72% to 73%. This sensitivity to change shows how tough it will be for Nvidia to exceed its historic 75% level.

It’s a similar – but slightly different – situation with operating margins, which continue to grow from already phenomenal levels, albeit more slowly than before. If sales keep growing and Nvidia keeps a hold on costs, it will likely still be able to wring a few more points of operating margin. But the days of 8.1 year-over-year percentage-point gains Nvidia saw in 2024 are gone.

Nvidia’s bleeding-edge products keep it in the lead for now. Still, everyone wants a piece of these fat margins, from established players such as Broadcom (AVGO) to upstarts such as Cerebras Systems (CBRS), which makes wafer-scale chips for AI data centers.

None of this suggests that the near future won’t get better for Nvidia, but the ability for it to get much better has been diminished, since margins can’t expand at yesteryear’s levels anymore. But this is only one part of the concerns suggesting that Nvidia must use new levers, such as more aggressive financing, to keep its sales growth on track.

(Looking for a step-by-step plan to help you use AI in your own investing? Here’s how the N.E.W. System works.)

Nvidia Is Aggressively Financing the AI Boom, Which Comes With Higher Risks

Borrowing behind the AI build-out has surged, especially in 2026. Hyperscalers such as Amazon (AMZN), Microsoft (MSFT), Alphabet (GOOGL), and Meta Platforms (META) have spent nearly all their 2026 cash flow on capital expenditures, most of it on the AI build-out.

To keep that build-out on pace, these hyperscalers have each started borrowing tens of billions of dollars in the past year. With hyperscalers’ AI spending projected to top $1 trillion in 2027 – well beyond their estimated cash flow – they’ll need to borrow even more money.

While that increased financing means the spending spree for Nvidia’s chips won’t keep growing forever, the chipmaker has begun offering more short-term financing on its own balance sheet.

That is, Nvidia is offering more generous payment terms to larger customers, giving these more important clients up to a year to pay. CFO Colette Kress said about 25% of Nvidia’s 2027 sales could be to AI labs (such as OpenAI) where Nvidia is using its own balance sheet.

You can see this change in a metric called accounts receivable, which has soared in recent years, as Nvidia finances more sales, typically for short periods. The average is around 60 days, or about two months. While the figure dipped in the first quarter (not necessarily a bad thing), it rebounded hard in the second quarter, though only to its historical levels.

To judge these receivables, analysts look at days sales outstanding (“DSO”), which is the ratio of accounts receivable to a quarter’s average daily sales. DSO shows whether a company may be expanding credit to less worthy customers to keep its sales growth continuing.

This trend isn’t worrisome yet, but it’s worth watching as Nvidia expands its financing, especially to clients with major financing issues such as OpenAI, which is hemorrhaging billions in cash each quarter. Of course, it’s not just OpenAI that could hurt Nvidia, but even established players that rely on OpenAI remaining solvent to continue moving billions in AI spending through the system.

After such a consistent trend for years, a sudden rise in DSO may offer investors an early read on how the business is going. Nvidia is already warning investors that the number should rise – and it’s a sign that it must move more of this financing to its own balance sheet to keep sales rising. If credit problems arise, they will likely appear in rising days sales outstanding figures.

That puts greater credit risk on Nvidia, drawing it even closer to less well-financed players.

More broadly, you can see Nvidia rushing to keep its sales growth on track, as it becomes the “central bank of AI.” It has lined up a $250 billion backstop for OpenAI to construct a massive data center as well as a $350 billion financing arrangement for the facility’s chips.

Nvidia also announced an incomplete $500 billion deal with major investors before it had been finalized. In the end, it’s less a deal than a memorandum of understanding – “a deal to do a deal” – despite the breathless media headlines making it seem like the terms were in place.

Despite this quarter’s excellent numbers, Nvidia is pushing hard to line up financing for its customers and keep all its plates spinning. With each passing quarter, the growth will become harder to sustain, so watch for a rise in DSO as an early warning sign of trouble.

Nvidia’s Stock Looks Undervalued, But Is It Really?

On the surface, Nvidia looks cheap for a company growing at such a brisk pace. In May, various analysts raised stock price targets based on Nvidia’s rising earnings for 2026 and 2027, due to surging AI investment.

For example, Wells Fargo raised its price target from $265 per share to $315 on earnings estimates of $8.45 per share this year and $11.95 per share for calendar year 2027. This level of explosive growth implies a price of less than 19 times next year’s earnings at a share price around $220.

This price-to-earnings (P/E) ratio is well below the stock’s 32 times earnings over the past three years, says Wells Fargo.

In absolute terms, this forward P/E ratio looks quite reasonable for such high growth. But it assumes that growth will continue, even as Nvidia desperately works to provide financing for its clients. Some of Nvidia’s levers for growing profits are becoming less powerful, too.

So this assumption of growth will look fine until one day it suddenly won’t.

It’s less a question of “if” than “when” the Nvidia juggernaut can no longer sustain the high expectations it’s setting now.

Arguably, the world’s most-watched company is trading for what looks like a value. If you believe in the wisdom of the market, you want to be quite sure why it’s putting the company – and many high-growth AI plays – in the bargain bin. They may not be as undervalued as they appear.

Regards,

James Royal, PhD

Editor’s Note: Whitney Tilson — the hedge fund manager CNBC called “The Prophet” — says America has reached its “Ripping Point.” The old financial order is being torn apart, and he believes most investors have no idea what’s coming in the next six months. He’s named the stocks he thinks will be destroyed in the chaos — and the ones he believes will soar. Watch his free presentation while it’s still available.