The 1 Number That Would Change My Mind About Nvidia Stock

I think Nvidia (NASDAQ:NVDA) stock is a buy. Its price-to-earnings ratio is around 15 using analysts' consensus estimate for its next fiscal year (ending January 2028). For a company whose revenue more than doubled year over year last quarter, that price looks fair to me.

But it pays to know beforehand what would change that view. Nvidia is worth about $5.8 trillion, with shares trading around $239 as I write, near their all-time high. Investors paying that much are relying on Nvidia to keep charging buyers a premium for its chips.

There's one number Nvidia reports every quarter that I watch most closely: gross margin, or the share of revenue left after the direct cost of making what it sells. If it drops under 70% in a quarter with no one-time charge to explain it, I'd no longer call the stock a buy.

Image source: Getty Images. Image source: Getty Images.

Why not revenue growth?

Revenue growth may look like the better number to watch. But it's a weak early warning for Nvidia right now, because the company has already told investors it should slow.

Nvidia's revenue climbed 106% year over year to $96.2 billion for its fiscal second quarter of 2027 (the three months ending July 26, 2026). Management's fiscal third-quarter guidance of around $108 billion would mean growth easing to about 89%.

And on the earnings call, chief financial officer Colette Kress said the company's preliminary expectation for fiscal 2028 is revenue growth of about 70%. Even after slowing, in other words, growth could still be remarkable.

Revenue can also keep climbing even if Nvidia needs to cut prices, because customers might just buy more chips at lower prices.

Gross margin, though, says more about how much buyers are still willing to pay for Nvidia's tech. If customers ever find options good enough to push prices down, this is arguably where the pressure might show up first.

Nvidia rarely falls below 70%

Showing how much pricing power Nvidia has kept through the artificial intelligence (AI) boom, its gross margin has been at least 70% for 12 of its past 13 quarters. This run started with a 70.1% margin for the quarter ending in July 2023. It peaked at 78.4% in the first quarter of fiscal 2025, before sales of Nvidia's newer Blackwell chips started. Since then, it has mostly held between around 72% and 75%.

Just one quarter in this period fell short. In the first quarter of fiscal 2026, Nvidia took a $4.5 billion charge on H20 chips it could no longer ship to China without a license, and gross margin dropped to 60.5%. But that was a charge linked to export rules, not a sign customers were paying less.

A margin below 70% with no charge attached, then, would be the first in over three years. I'd read it as evidence that something about Nvidia's pricing power had changed.

A drop to 72% wouldn't bother me

Sure, Nvidia's margin is already due to come down. Management forecast a fiscal third-quarter gross margin of 74%, plus or minus half a percentage point, after 75% in fiscal Q2.

Memory prices have risen more than Nvidia expected, Kress said, so gross margin should bottom out at 71% to 72% in the fiscal fourth quarter. She expects it to settle at 72% to 73% in fiscal 2028, when price increases Nvidia has already put in place kick in.

"Tighter memory supply is a symptom of the same demand surge that's driving our own growth," Kress said.

In short, this drop has a known cause and a stated recovery plan. A margin under 70% is a different story. It might mean memory costs kept outpacing Nvidia's price increases, or that customers pushed back against those increases.

And with the fiscal third quarter's guided revenue of around $108 billion, the gap between a 75% gross margin and a 70% one is about $5.4 billion in gross profit each quarter.

A price-to-earnings ratio of 15 only looks cheap if the expected earnings show up, and gross margin is a big part of what turns Nvidia's revenue into them.

For now, Nvidia's margin is landing around where management said it would. The fiscal fourth-quarter report, probably due early next year, should show if the bottom holds at 71% to 72%.

If the margin falls below 70% without a charge to blame, I'd consider selling the stock. Until then, I think shares are still worth buying at this price.

Daniel Sparks and his clients do not have positions in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.