NVIDIA Earnings Analysis: The AI Chip Titan’s Glory and Challenges

NVIDIA reported Q4 FY2025 revenue of $39.3 billion, up 78% year-over-year, with net profit reaching $22 billion, a 72% increase. These impressive figures underscore the relentless demand for AI computing power.

However, traders reacted with caution. NVIDIA’s stock initially gained 0.2% in after-hours trading but later slipped over 1.7%, while the Nasdaq remained under pressure. This lukewarm reaction suggests market concerns over the sustainability of NVIDIA’s growth, especially amid rising geopolitical risks and emerging competition from players like DeepSeek.

Key Takeaways and Market Reactions

1. Data Center Dominance Continues

NVIDIA’s growth remains heavily reliant on its data center business. In Q4, this segment generated $35.6 billion, accounting for 91% of total revenue—a 93% year-over-year increase. On a full-year basis, data center revenue hit $115.2 billion, marking a tenfold surge in just two years. Major tech giants like Microsoft and Amazon are aggressively acquiring NVIDIA GPUs to support their AI infrastructure, creating a strong "snowball" effect.

Despite the revenue and profit beats, investors remain wary of NVIDIA’s dependence on a single business segment, raising concerns about its long-term growth trajectory.

2. Blackwell Chips See Strong Demand but Face Supply Constraints

The new Blackwell AI chips set a sales record, contributing $11 billion in their debut quarter—31% of data center revenue—making them NVIDIA’s fastest-growing product ever. CEO Jensen Huang emphasized in the earnings call that demand for Blackwell is "exceptionally strong," particularly in AI inference applications.

However, supply chain challenges remain a key concern. TSMC’s 3nm process and CoWoS packaging capacity constraints could lead to shipment delays, potentially impacting NVIDIA’s Q1 FY2026 revenue growth.

The DeepSeek Disruption and AI Compute Demand Outlook

1. DeepSeek’s "Catfish Effect"

DeepSeek-R1’s launch initially sparked concerns that its efficient inference models could reduce demand for high-end GPUs, contributing to NVIDIA’s 17% stock drop in late January.

However, NVIDIA’s management countered this narrative, stating that advanced inference tasks require up to 100 times the compute power of traditional models. In fact, DeepSeek’s technology is likely to drive even greater AI adoption, indirectly benefiting NVIDIA. The company has also moved swiftly to collaborate with DeepSeek, optimizing the R1 model for Blackwell chips to enhance inference efficiency—helping restore market confidence.

2. The China Factor

DeepSeek’s rise is particularly significant for China’s tech sector, as its open-source models could accelerate domestic AI adoption, fueling further demand for compute power. However, U.S. chip export restrictions remain a major headwind for NVIDIA’s China business.

The latest earnings report shows that NVIDIA’s China revenue share has dropped below 10%, while Huawei’s Ascend 910B chips now command over 60% of the domestic AI inference market. If geopolitical tensions escalate, NVIDIA could face further setbacks in China, with local firms increasingly developing their own chips.

Growth Concerns: Profitability and External Risks

1. Gross Margin Pressures and Rising Costs

NVIDIA’s Q4 gross margin declined to 73%, down 3 percentage points year-over-year, and is projected to fall further to 70.6% in the next quarter. This trend reflects higher production costs for Blackwell chips and increased supply chain investments. While revenue growth remains strong, sustained cost pressures could limit profit expansion.

2. Geopolitical and Supply Chain Risks

U.S. chip export restrictions not only weigh on NVIDIA’s China sales but also introduce supply chain uncertainties. TSMC’s capacity limitations and CoWoS packaging bottlenecks could become critical growth constraints. Additionally, if the U.S. government tightens export controls further, NVIDIA’s global market share could face greater challenges.

Looking Ahead: AI Boom and Market Divergence

1. Supply Chain Optimization and Capacity Expansion

Blackwell’s production ramp-up will be a key short-term driver. TSMC’s 3nm yield rates and CoWoS packaging improvements will directly impact NVIDIA’s shipment pace. If supply chain bottlenecks ease, NVIDIA’s Q1 FY2026 revenue guidance of $43 billion could be exceeded.

2. Diversification Beyond Data Centers

NVIDIA is actively expanding into automotive, robotics, and edge computing to reduce its reliance on data centers. However, these markets are highly competitive, with rivals like Qualcomm and Mobileye vying for dominance. The high degree of customization required by customers also presents integration challenges for NVIDIA.

3. Monetizing Its Software Ecosystem

Transforming the CUDA software stack into a subscription-based service could significantly boost NVIDIA’s profitability. If it successfully adopts an Adobe-style SaaS model, NVIDIA’s valuation potential could expand dramatically.

Balancing Challenges and Opportunities

Ultimately, NVIDIA’s latest earnings reaffirm the strength of AI computing demand, but signs of a growth ceiling are emerging. On one hand, slowing Moore’s Law and advances in sparse computing could reduce dependence on high-end chips. On the other hand, customer-led chip development and geopolitical risks are reshaping the competitive landscape.

To maintain its dominance, NVIDIA must accelerate innovation while finding a new equilibrium between diversification, cost control, and ecosystem expansion. As the AI industry transitions from an "arms race" to real-world applications, NVIDIA’s growth model is shifting from "hyper-expansion" to "high-quality development."

For traders, short-term stock movements will likely be influenced by supply chain constraints and geopolitical risks, while NVIDIA’s long-term investment appeal hinges on its ability to sustain AI-driven growth amid intensifying market competition.