Nvidia investors beware: Firm flags 2 risks after better-than-expected Q2 earnings

Nvidia’s AI boom, stellar Q2, and an even better guidance for 2028 has brought to the shore a set of challenges, with the chipmaker warning that memory shortages will weigh on margins and rising debt could put pressure on its financial condition and cash flows.

1.) Nvidia margins to bottom in fiscal fourth quarter

Nvidia expects its gross margin to decline and bottom out in the fourth quarter of fiscal 2027, at 71% to 72%, with higher memory prices partly responsible for the pressure.

“Memory scarcity today is being driven in large part by the AI buildout itself,” Nvidia Chief Financial Officer Colette Kress said, adding that the company wanted to address the issue directly rather than leave it as an open question.

2.) Nvidia flags indebtedness as standalone risk factor

For the first time, Nvidia’s quarterly filing on Wednesday identified indebtedness as a standalone risk factor, warning that rising obligations could “adversely affect” the company’s financial condition and cash flows.

As of July 26, Nvidia had $33.5 billion in senior notes outstanding, alongside a $25 billion commercial paper programme. Earlier this year, Nvidia said it could raise up to $25 billion through unsecured commercial paper notes, marking the chipmaker’s first bond sale since the start of the AI boom.

The latest quarterly filing showed that $15 billion of debt is due within one to five years. In its previous quarterly filing, Nvidia had reported $2.75 billion of debt due in the same period.

Nvidia warned that maintaining its indebtedness, along with contractual restrictions and additional debt issuance, could force it to devote a substantial portion of operating cash flow to debt servicing and principal repayments.

“Maintenance of our indebtedness, contractual restrictions, and additional issuances of indebtedness could cause us to dedicate a substantial portion of our cash flows from operations towards debt service obligations and principal repayments,” the company said.

Nvidia 2028 guidance

Nvidia is betting that the artificial intelligence boom is far from over. The chipmaker on Wednesday forecast a 70% jump in revenue next fiscal year, pointing to continued demand for AI computing even as shortages of memory components threaten to constrain how quickly it can expand.

“AI has reached its inflection point. It's doing useful work. Its tokens are productive and profitable. Now, compute is revenue,” Nvidia Chief Executive Jensen Huang said.

Yet the guidance could have been even stronger if not for supply constraints. Nvidia is grappling with shortages of components including memory, which is facing a global crunch as AI buildouts accelerate.

The forecast is likely to ease investor concerns over how long the AI spending surge can sustain its extraordinary pace after years of explosive growth. Nvidia is projecting revenue growth well above Wall Street expectations while pointing to demand from the biggest technology companies as well as AI labs. The message is clear: the market for AI computing is still expanding rather than approaching a peak, even though supply constraints are limiting how much of that demand Nvidia can capture.

Against that backdrop, Nvidia's second-quarter results still delivered another blockbuster performance. Revenue more than doubled to $96.22 billion, beating estimates of $92.17 billion. Adjusted profit came in at $2.22 per share for the three months ended July 26, compared with estimates of $2.10.

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