2 Reasons to Sell Nvidia Stock (and 1 Reason to Buy)

With shares down about 15% since the company’s second-quarter earnings report on Aug. 8, Nvidiahis (NASDAQ: NVDA) the legendary running of the bulls might be in trouble. While operating results remain as strong as ever, investors may be increasingly concerned about the sustainability of Nvidia’s business model and the artificial intelligence (AI) industry as a whole. Let’s discuss two reasons to consider selling the stock and one reason to buy the dip.

Nvidia’s margins show unsustainable

Gross profit margin compares a company’s revenue to the direct production costs of selling its goods or services before overheads such as office wages, advertising, or research. This metric typically favors software-as-a-service (SaaS) companies that don’t sell physical products. But with a gross margin of 75%, Nvidia bucks the trend.

For context, MicrosoftTHE the biggest The world’s SaaS company, has a gross margin of just under 70%, while Alphabetthe parent company of Google and YouTube, is 57%. Nvidia now sells physical hardware at a bigger markup than others can sell digital services. And this dynamic does not seem natural or sustainable in the long term.

In general, free markets tend to compete out of excess profitability. And if that doesn’t work, governments tend to get involved.

This month, Bloomberg News reported that the Department of Justice had subpoenaed Nvidia in a “growing antitrust probe” related to its dominant position in the AI ​​processor market. The report claims that officials suspect the company could to do it is harder for customers to use other providers and penalizing if they do.

Nvidia denies the report and claims it is high market share (estimated at 88%) results from the speed and better quality of its product. Either way, Nvidia’s business practices (legal or not) may start to attract the wrong attention. And investors should take note.

The software side of the industry doesn’t carry it weight

For better or for worse, Nvidia has managed to keep the competition at bay in the AI-enabled hardware market. That said, the company can’t control the consumer-facing software side of the industry, which is where the cracks in the long-term thesis start to show.

Conformable The New York Timesthe AI ​​boom can it endswith several high-profile start-ups such as Inflection AI, Stability AI and Anthropic generating massive losses and/or reducing their operations. Cloud computing giants like Google or Amazonhis AWS does better by targeting the infrastructure side of the opportunity (rental computing power). But if start-ups fail, demand for data centers could also decline.

The story continues

Some of Nvidia’s best clients such as Meta platformsdon’t expect to make money from their AI investment either whenever soon.

goal, which is known for open-source large language model Llama is simply trying to stay on the cutting edge of technology. But while this sounds great in theory, it’s reminiscent of his failed pivot to the metaverse in 2021 — a money-burning experiment that it was eventually withdrawn based on shareholder reactions.

Shareholders may tolerate companies spending billions on experimental technologies when the economy is buoyant. However, should macroeconomic conditions strengthen, management teams will be under pressure to fall back.

Generative AI could be just the beginning for Nvidia

Despite all these challenges, Nvidia is not a bad company. The chipmaker is producing cutting-edge hardware that could quickly find new use cases even as generative demand for AI fades. The most promising opportunity may be autonomous cars, which McKinsey analysts believe could generate as much as $400 billion in revenue by 2035.

robotics, augmented realityand even the metaverse could also sustain demand for Nvidia hardware for decades to come.

at the end of the day long-term investing is the key to sustainable returns in the stock market because it dampens market volatility and noise — allowing time for a company’s thesis to play out. Nvidia bulls may be willing to overlook some of the chipmaker’s near-term challenges in favor of a bigger picture.

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Suzanne Frey, chief executive at Alphabet, is a member of the Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a board member of The Motley Fool. Will Ebiefung has no position in any of the shares mentioned. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, Microsoft and Nvidia. The Motley Fool recommends the following options: long $395 January 2026 Microsoft calls and short $405 January 2026 Microsoft calls. The Motley Fool has a disclosure policy.

2 Reasons to Sell Nvidia Stock (and 1 Reason to Buy) was originally published by The Motley Fool