Nvidia Corporation (NASDAQ: NVDA) experienced a sharp reversal on Friday, with shares closing down 4.6% at $217.55. The decline erased approximately $253 billion in market capitalization, as investors shifted their focus to the company's margin outlook despite a robust revenue forecast.
The selloff followed a strong 8.74% rally on Thursday, which was fueled by better-than-expected fiscal second-quarter results and an upbeat guidance for the current quarter. However, the initial enthusiasm quickly gave way to concerns over a projected decline in gross margins, prompting a reassessment of the stock's valuation.
Nvidia's fiscal third-quarter revenue guidance stands at $108 billion, give or take 2%, representing a sequential increase of $11.8 billion. While this would mark another record quarter, the implied growth rate of 12.2% represents a slowdown from the 17.9% sequential growth achieved in the second quarter. Additionally, the company guided gross margins to 74.0%, down one percentage point from the previous quarter's 75.0%.
The margin guidance translates to roughly $1.08 billion in potential profit impact on projected sales. This calculation helps explain why even a forecast for record revenue has not fully resolved the ongoing debate over Nvidia's valuation, especially with the stock trading at 27.3 times trailing earnings.
Operational performance remains stellar. Nvidia posted fiscal second-quarter revenue of $96.2 billion, a 106% year-over-year increase, with data-center revenue surging 117% to $89.0 billion. Adjusted earnings per share came in at $2.22, surpassing Wall Street's consensus estimate of $2.09.
Investors also noted that the management outlook excludes any data-center compute revenue from China, and persistent supply constraints remain a limiting factor. Despite these headwinds, Nvidia projects revenue to grow by roughly 70% in fiscal 2028, a projection that initially sent shares higher.
Capital returns provide an additional layer of support. Nvidia distributed approximately $26 billion via dividends and share repurchases last quarter, with nearly $99 billion still available under its buyback authorization. However, the company has halted a revenue-sharing credit initiative for smaller AI cloud firms, a move that could ease concerns about circular demand but risks cutting off support for marginal purchasers.
Analysts remain largely bullish. According to FactSet data, Nvidia holds 57 Buy ratings, seven Overweight, two Hold, and one Sell. The median price target stands at $316.60, implying a potential upside of roughly 46% from Friday's closing price.
The market's reaction underscores the delicate balance between growth expectations and profitability metrics. While Nvidia's revenue trajectory is exceptional, the margin guidance has introduced a note of caution among investors. The coming quarters will be critical in determining whether the company can sustain its growth momentum while managing margin pressures.
Risks remain on both sides. A rebound in Rubin supply or increased spending from hyperscalers could make Friday's drop short-lived. Conversely, weaker customer financing, restrictions in China, or ongoing margin erosion could put the current earnings multiple at risk.
