Did Nvidia top its profit margins What you should know
NVIDIA has maintained its dominant leadership in the fields of AI, data centers, and gaming, establishing a robust foundation for continued growth. In its fiscal Q1 2025, the company reported record-breaking revenue and remarkable earnings. For fiscal Q2 2025, NVIDIA projects revenue of $28.3 billion with gross margins approximately at 75%. Considering the increasing competition and supply chain risks, how sustainable are NVIDIA’s profit margins? We share our insights.
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Key risks to Nvidia profit margins in 2026-2027
NVIDIA’s profit margins face several considerations, which we highlight below:
Competition: As the AI and data center markets grow, competition from other semiconductor companies could intensify.?Maintaining high margins may become challenging if competitors offer similar products at lower prices.
Supply Chain Disruptions: Global supply chain challenges, such as semiconductor shortages or geopolitical tensions, could impact production costs and availability of components, affecting margins.
Technological Shifts: Rapid advancements in AI hardware and software could lead to shifts in demand.?If NVIDIA fails to adapt quickly, it might face margin pressure.
Regulatory Changes: Regulatory actions related to antitrust, export controls, or environmental policies could impact NVIDIA’s operations and costs.
Currency Fluctuations: NVIDIA operates globally, so exchange rate fluctuations may affect revenue and costs, impacting margins.
Risk of growing competition
There are several major competitors for Nvidia: AMD, Broadcom, Micron. AMD (Advanced Micro Devices): AMD is a significant competitor, particularly in the graphics processing unit (GPU) market and data center accelerators. AMD’s MI300 accelerator, launched in December 2023, is designed to compete directly with Nvidia’s data center accelerators.
AMD’s profit margins are influenced by several key factors:
NVIDIA’s profit margins are influenced by several key factors:
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Supply chain risks
Taiwan Semiconductor Manufacturing Company (TSMC) is the main supplier of chips to Nvidia in 2024. TSMC remains the predominant manufacturer of Nvidia’s high-end AI chips, which are crucial for Nvidia’s operations and growth. Analysts have noted that TSMC plans to significantly increase its production capacity to meet the growing demand for these chips (according to Business Insider ).
Additionally, TSMC’s unique manufacturing model and substantial investments have solidified its position as the leading supplier for Nvidia. TSMC is set to triple its 3 nm family capacity and expand its Chip-on-wafer-on-substrate (CoWoS) capacity, which further supports Nvidia’s advanced semiconductor needs.
Despite strong partnership between the two companies we foresee high risks for Nvidia’s profitability in the following business-case scenarios for the years 2025-2026:
Scenario 1 – Taiwan Semiconductor increases prices for its AI chips outside of Taiwan
If Taiwan Semiconductor Manufacturing Company (TSMC) decides to increase prices for AI chips in the 2025-2026 period, it could have several potential impacts on Nvidia’s profitability.
Increased Costs: As TSMC is a key supplier for Nvidia, an increase in AI chip prices would directly raise Nvidia’s production costs. This could squeeze Nvidia’s profit margins unless the company passes these costs onto their customers by increasing the prices of their products. However, price hikes could potentially affect demand adversely, depending on the elasticity of demand for Nvidia’s products.
Market Position and Competitive Landscape: Nvidia is a dominant player in the AI chip market, and its products are highly valued for their performance. Even with increased costs, Nvidia might maintain its market position if competitors face similar cost increases from TSMC. However, if competitors find alternative suppliers or more cost-effective solutions, Nvidia could lose market share.
Revenue Growth: Despite potential cost increases, Nvidia’s revenue might still grow due to the high demand for AI-related technologies. For instance, analysts have noted strong demand for AI chips which has been driving growth in TSMC’s revenue and profits (as noted by Reuters ). If Nvidia continues to innovate and capture the growing AI market, the revenue growth could offset some of the pressure on profitability from increased costs.
Long-Term Strategy: Nvidia might also look into long-term strategies such as diversifying its supplier base, investing in its own manufacturing capabilities, or even acquiring other companies to mitigate the impact of supplier price hikes.
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Estimating Nvidia’s gross margin sensitivity
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Scenario 2 – Regulatory changes & Geopolitics
The partnership between Nvidia and Taiwan Semiconductor Manufacturing Co. (TSMC) faces several geopolitical risks in the coming years:
Taiwan Strait Tensions:
The geopolitical situation in the Taiwan Strait poses risks.?TSMC, which produces approximately 90% of the world’s advanced chips for AI and quantum computing, could face disruptions due to regional tensions.
In 2024, tensions in the Taiwan Strait have escalated due to several factors:
Leadership Change: Taiwan’s President Lai Ching-te, a member of the China-skeptic Democratic Progressive Party (DPP), took office.?In his inaugural speech, he referred to Taiwan as a “sovereign, independent nation,” which irked Beijing .
Military Drills: China’s People’s Liberation Army conducted large-scale naval and artillery drills around Taiwan, warning against “Taiwan independence separatist forces.” These exercises were seen as a message to the new Taiwanese administration.
Cross-Strait Dialogue : China emphasized the importance of adhering to the “1992 Consensus,” which acknowledges “one China.” However, tensions persist regardless of who occupies Taipei’s Presidential Office Building .
Increased Air Activity : Chinese warplanes were detected over the Taiwan Strait, with most crossing the median line—a de facto maritime boundary between the two countries .
Overall, the situation remains delicate, with both sides closely monitoring developments.?The United States also plays a crucial role in maintaining stability in the region.
U.S. Export Controls:
U.S. restrictions on advanced semiconductor equipment and technology exports to China may impact Nvidia’s operations.?The company aims to comply with regulations while navigating these challenges.
China Market Authorization: Nvidia’s permission from the U.S. government to develop and export its H100 chip for the Chinese market is nearing its expiration date. While a new authorization has been secured for research and development, the direct sale of A100 and H100 chips in China remains prohibited. Further U.S.?restrictions could impact Nvidia’s operations in the largest global market for semiconductors.
Antitrust Investigations: Nvidia is under investigation by antitrust regulators in multiple jurisdictions, including the European Union, the United States, and China.?These investigations could potentially lead to regulatory actions.
Our view
Nvidia’s profitability in the years 2025-2026 can be significantly influenced by both the price increase of AI chips and geopolitical factors. Below we summarize our view:
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Impact of AI Chip Price Increase
Nvidia is set to introduce new AI chips in 2025 and 2026, such as the Blackwell Ultra and Rubin platforms, which are expected to drive substantial revenue growth. These next-generation chips are anticipated to be more powerful and efficient, potentially justifying higher prices. We have high expectations for Nvidia’s stock price targets in 2025, driven by strong financial performance and strategic growth initiatives. Given the robust demand for AI technologies, these price increases could substantially enhance Nvidia’s profitability.
An increase in TSMC’s prices for AI chips would directly raise Nvidia’s COGS. This increase could reduce Nvidia’s gross margins unless Nvidia can pass these cost increases onto its customers through higher chip price. Due to high demand for high-quality AI chips, we believe that Nvidia could temporary pass TSMC’s price increases to its customers. However, in the long-term, we foresee strengthening competition to Nvidia’s product mix. Therefore, Nvidia’s profit margin peak is inevitable in the coming years.
Geopolitical Factors
Geopolitical tensions, particularly those involving the U.S. and key semiconductor production regions like Taiwan, could impact Nvidia’s operations and stock price. Any disruptions in semiconductor supply chains due to geopolitical conflicts or policy changes could affect production costs and availability of key components. This could create volatility in Nvidia’s profitability and stock performance, making it crucial for investors to stay informed about global political developments.
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Our investment recommendation
Given the current market conditions and future projections, investors should consider the following strategies:
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