Nvidia's CFO Just Explained Why the AI Boom Is Eating Its Gross Margin -- and It's a Green Light for Micron

Nvidia's (NASDAQ: NVDA) fiscal 2027 second-quarter earnings report was less of a quarterly update than it was a reminder that the company sits at the center of the artificial intelligence (AI) infrastructure build-out. Total revenue reached $96.2 billion, more than double the $46.7 billion posted a year ago and up 18% from the prior quarter. The more striking comparison, however, sits inside the underlying mix of Nvidia's sales.

The company's data center segment generated $89 billion alone. This single franchise now produces more sales than Nvidia's entire company did one year ago. These figures are proving that the hyperscaler capital expenditure (capex) boom is no longer an abstract backdrop. Cloud providers and AI infrastructure developers are adding capacity at full speed, and Nvidia is converting on that spend with unprecedented efficiency.

With that said, Nvidia's print did contain a quieter signal that may matter even more for the next name in the AI chip value chain: Micron Technology (NASDAQ: MU). Nvidia's management guided for a lower gross margin, and the explanation pointed directly at memory. This means that Nvidia is paying a premium for the stacks that sit beside its GPUs, making pricing power flow to memory suppliers like Micron.

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Nvidia's blowout quarter underscores its scale and dominance

Nvidia's numbers leave little room for understatement. Gross margin came in at 75%, essentially unchanged sequentially and up by 2.6 points from a year ago. Operating income rose 19% sequentially and 124% year over year to $63.7 billion. Meanwhile, net income was $59.7 billion, or $2.46 per share.

Within the data center book, hyperscale customers contributed $48.7 billion of revenue -- an increase of 102% year over year. It's clear that Nvidia is far from demand constrained, a distinction that showed up in both the beat against its own outlook and the size of the upcoming guide. Guidance is the other half of the print that I am more focused on. For the third quarter, Nvidia expects to generate revenue of $108 billion, plus or minus 2%. Of note, the company is assuming no compute sales to China.

Perhaps the most revealing line in the company's outlook is its gross margin. Generally accepted accounting principles (GAAP) and non-GAAP (adjusted) gross margin are both expected to be 74%, plus or minus 50 basis points. That is a full point below the margin Nvidia just delivered. Furthermore, management explained that gross margin is expected to bottom somewhere between 71% and 72% by the fourth quarter before recovering in fiscal 2028.

What is eating into Nvidia's margin?

Nvidia Chief Financial Officer Colette Kress was direct about the cause of the eroding margins. The step-down is clearly not a demand problem, nor is it a sudden collapse in Nvidia's pricing power with customers. Instead, it has to do with the rising cost of memory.

High bandwidth memory (HBM) is no longer a commodity add-on in chip clusters. Rather, it has quickly become a co-equal component of the accelerator package. Kress told investors that Nvidia's commitments for critical components increased from $119 billion last quarter to $279 billion, saying it was "primarily related to the procurement of memory."

I see Nvidia's margin cut as a positive signal for Micron. When a customer as large and as sophisticated as Nvidia accepts a lower gross margin outlook and cites memory prices as the culprit, it confirms the bottleneck is moving downstream into DRAM and HBM. Micron is one of a few producers that can supply the stacked memory AI platforms require.

Higher commitments from Nvidia are, by definition, higher realized average selling prices for memory vendors like Micron on the other side of the purchase order. Said differently, the same hyperscaler capex cycle fueling Nvidia's growth is now filling Micron's supply. The difference is that Micron is positioned to capture the inflation from component prices that Nvidia can no longer treat as a stable cost.

Nvidia's earnings performance is a preview for Micron

Investors no longer need to guess whether the AI infrastructure cycle is meaningful enough to reprice memory. Nvidia's lower margin guide just confirmed that it is. The dollars leaving Nvidia's gross margin are not disappearing. Instead, they accrue to companies like Micron, which are shipping HBM and adjacent DRAM into Nvidia's racks.

In my eyes, the prudent response is to watch Micron with the same intensity reserved for Nvidia. If the cost pressures Nvidia described are real, then Micron is positioned for the kind of print that should reset expectations and, potentially, the stock's momentum. The bull thesis around Micron stock is no longer a "hopium trade" attached to a historically cyclical name. Instead, it is quietly becoming an extension of Nvidia's own trajectory.

Adam Spatacco has positions in Nvidia. The Motley Fool has positions in and recommends Micron Technology and Nvidia. The Motley Fool has a disclosure policy.