One “glaring downside” in Nvidia’s earnings

With more than 90% of the nearly 70 analysts covering Nvidia rating the stock a buy, sometimes one gets the sense that Jensen Huang’s AI chip behemoth can do no wrong.

But it’s always worth pointing out the odd pimple on the fairly pristine earnings report the company issued on Wednesday. In a report published after Nvidia’s numbers, Barclays analyst Tom O’Malley, who also maintains an overweight rating on Nvidia shares, highlighted one of the few slightly off notes in the company’s strong results. He wrote:

“It sounds like the early Blackwell transition saw more discrete B200 sales than systems, which accounts for the Networking miss that was probably the only glaring downside to the print. NVL systems are expected to see higher networking content due to the NVSwitch trays being classified in the Networking bucket, which should help re-accelerate the business as Blackwell continues to ramp. Another point here is the GM step down, which the company had called out in prior quarters and the Street largely didn’t believe. That metric will stay in the lower 70% for April/July with a material step up later in the year.”

Translation? Nvidia is in the midst of ramping up its new class of AI graphics processing units, the specialized processors that do the math needed to train and run AI systems. The new series is known as Blackwell, and over time it will overtake Nvidia’s wildly popular Hopper GPUs.

Nvidia GPUs can be sold individually, or as part of larger systems, which are essentially GPUs that are linked together with specialized wires, switches, and cooling equipment. These are the racks used in data centers.

During the company’s most recent quarter, sales of the individual Blackwell GPUs predominated, meaning the company didn’t sell as much of the networking equipment needed to link up the larger systems, known as NVLs.

Sales of those networking products dropped 3% during the quarter. But the company suggested that as buyers start to embrace its new Blackwell GPUs and buy the bigger racks, sales of the specialized networking equipment would rebound.

The transition to the new Blackwell product line is also expected to momentarily weigh on the company’s gross profit margins. (That’s the “GM” the analyst mentions above.)

But these, like the networking sales numbers, are expected to bounce back as the Blackwell system starts to be more widely adopted by the end of the year.