Nvidia's gross profit margins are coming down and are likely to stay down, but investor concerns are overblown, investment bank Morgan Stanley says. The gross margin debate has weighed on Nvidia stock since its last earnings report.
Morgan Stanley analyst Joseph Moore on Monday reiterated his overweight and "top pick" ratings on Nvidia stock. He has a price target on Nvidia shares of 150.
On the stock market today, Nvidia stock rose 3.5% to close at 106.47.
In a client note, Moore addressed the gross margin debate.
"Nvidia gross margins are likely to come down slightly, but the concerns are overblown in our view," Moore said. "There are several potential puts and takes on gross margins, but the biggest will be the decision to move to a more aggressive product positioning, including the annual product cadence, and the decision to price Blackwell for good value."
Nvidia Stock On Two IBD Lists
Since the start of the AI supercycle in mid-2023, Nvidia's gross margins had climbed steadily, but peaked at 78.9% in the company's April-ended quarter. Nvidia's gross margin was 75.7% in the July-ended quarter. And its gross margin is seen falling to 74% to 75% in the current period.
If Nvidia tried to maintain its high-70s gross margins, it would create an opening for rivals to take share in the AI chip market, Moore said.
"The ability to put pressure on the entire competitive set by reducing gross margins from 76% to 74.5% seems a good trade-off," he said. "Nvidia will be over 85% market share of AI processors this year."
Meanwhile, he's uncertain what it will take for Nvidia stock to move higher.
"We're not sure what turns sentiment around, but data points continue to be very supportive across the board," Moore said.
Nvidia stock is on two IBD stock lists: Leaderboard and Tech Leaders.
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