Nvidia Just Sounded the Silent Alarm -- but Are Investors Paying Attention?

Key Points

• It was business as usual for Nvidia in the fiscal second quarter, with Wall Street's artificial intelligence (AI) leader once again blowing past consensus expectations.

• However, Nvidia's revenue breakdown raises serious concerns about the sustainability of its growth.

• In addition, a "reward" for its shareholders contradicts the actions of the company's executives and directors.

• 10 stocks we like better than Nvidia ›

Over the past three years, nothing has moved markets more than the rise of artificial intelligence (AI), and no stock has benefited more from the evolution of AI than Nvidia (NASDAQ: NVDA). The prospect of having software and systems empowered with AI making split-second decisions is a potential game-changer in most industries around the globe.

Nvidia has found its niche as the leading supplier of graphics processing units (GPUs) used in enterprise data centers. GPUs are the "brains" that fuel split-second decision-making, as well as the training of large language models.

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No earnings report tends to garner more attention than Nvidia. While surpassing Wall Street's consensus revenue and profit forecasts has been something of the norm, Nvidia's latest report sounded a silent alarm that should serve as a warning to shareholders, as well as temper artificial intelligence hype.

Image source: Nvidia.

It was business as usual for Nvidia in the fiscal second quarter

If there's one thing Nvidia has on its side, it's consistency. Its $46.7 billion in net sales (up 56% from the year-ago period), and its $1.05 in earnings per share (EPS), both handily leaped over the bars laid by Wall Street analysts. This was the 11th consecutive quarter that Nvidia's EPS surpassed expectations.

The star of the show continues to be its data center segment, which accounted for more than 88% of reported sales. Exceptionally strong sales of Blackwell, coupled with "extraordinary" demand for next-gen chip Blackwell Ultra, according to CEO Jensen Huang, has powered the charge.

Perhaps the most impressive operating metric in Nvidia's fiscal second quarter report (ended July 27) is its generally accepted accounting principles (GAAP) gross margin, which clocked in at 72.4%. Though this was down 270 basis points from the prior-year period, it represents the first sequential quarterly improvement in gross margin in more than a year.

Huang hasn't been shy about his desire to maintain Nvidia's compute advantages and aims to bring a new advanced AI chip to market each year. The ramp-up of Blackwell Ultra will be followed by the expected debuts of Vera Rubin and Vera Rubin Ultra in the latter-halves of 2026 and 2027, respectively. This uptick we're seeing in GAAP gross margin indicates Nvidia is maintaining strong pricing on its AI hardware, at least for now.

In addition, Nvidia's about-face with its gross margin may indicate ongoing AI-GPU scarcity. Enterprise demand outweighing supply has been one of Nvidia's core catalysts to this point.

Nvidia is sounding a silent warning -- but will investors listen?

However, this earnings report isn't the slam-dunk it's made out to be, with two silent warnings alerting to potential trouble on the horizon for Wall Street's most valuable company and most-hyped innovation.

The first issue has to do with Nvidia's concentration of revenue, which can be found in its quarterly filed 10-Q with the Securities and Exchange Commission. Per the company, "For the second quarter of fiscal year 2026, sales to one direct customer, Customer A, represented 23% of total revenue; and sales to a second direct customer, Customer B, represented 16% of total revenue, respectively, both of which were attributable to the Compute & Networking segment."

In other words, approximately $18.2 billion of Nvidia's $46.7 billion in total sales came from just two companies during the latest quarter. Within its data center segment ("Compute & Networking"), this dynamic duo accounted for more than 44% of sales. Over the last year, Nvidia has become increasingly reliant on a narrower group of companies for its net sales and profit growth.

On one hand, optimists can argue that it's a good thing Nvidia is intricately tied to these dominant businesses. Though Nvidia doesn't spill the beans on the names of its top clients, customers A and B are (in no particular order) probably Meta Platforms (NASDAQ: META) and Microsoft (NASDAQ: MSFT), with both "Magnificent Seven" members aggressively investing in AI-data center infrastructure.

On the other hand, both Meta and Microsoft are internally developing AI-GPUs to use in their data centers. Even though these chips present no external threat to Nvidia, they're considerably cheaper and more readily accessible (not backlogged), and they can easily cost Nvidia valuable data center real estate in future quarters.

Furthermore, Huang's emphasis on bringing a new advanced AI chip to market each year has the potential to rapidly depreciate prior-generation GPUs. This could quickly devalue the GPUs that companies such as Meta and Microsoft have already purchased, which in turn may delay upgrade cycles and/or weigh on Nvidia's gross margin in the future if buyers opt for cheaper hardware.

Image source: Getty Images.

But wait -- there's more

The other silent and subtle warning investors will find in Nvidia's latest earnings release is its "reward" for long-term shareholders. With $14.7 billion remaining under its prior share repurchase authorization, Nvidia's board approved an additional $60 billion worth of buybacks.

Share buybacks and dividends are two of the most direct ways public companies create incentives for long-term investing. For businesses with steady or growing net income (and Nvidia certainly qualifies), share buybacks have the ability to increase EPS as the outstanding share count declines. In short, share repurchases can make a company's stock more fundamentally attractive to investors.

So why is a $60 billion share-repurchase allotment bad for Nvidia?

For starters, the last thing investors of a company that just delivered 56% year-over-year sales growth should want to see is it spending its capital on buybacks. Nvidia stock has gained more than 1,100% since 2023 began and is sporting a historically high price-to-sales (P/S) ratio. Aside from the fact that its shares aren't particularly cheap, a $60 billion share buyback authorization suggests management is struggling to find other high-growth initiatives to invest its capital into.

It's also incredibly odd to see Nvidia's board promote such a sizable repurchase program when no insider has purchased shares of the company since early December 2020. Over the trailing-five-year period, more than $4.7 billion of Nvidia stock has been sold by executives and board members.

Between Nvidia's dangerous revenue concentration and its head-scratching buyback allotment, things may not be as perfect for the company or the AI revolution as they appear.

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Sean Williams has positions in Meta Platforms. The Motley Fool has positions in and recommends Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.