Nvidia Stock Plunges 8.5% Despite 70% Profit Margin: What Happened?

Unveiling the Reasons Behind the Unexpected Drop

Nvidia, a leading name in artificial intelligence (AI) chip manufacturing, recently experienced a significant stock price decline of over 8%, even after reporting a robust profit margin forecast of 70%. On February 27, 2025, the company's shares closed at $120.15, reflecting an 8.48% drop from the previous day, marking the lowest level since February 4. This downturn shaved its market capitalization down to $2.942 trillion, slipping below the $3 trillion threshold. The sudden plunge came as a surprise to many, especially following Nvidia’s impressive quarterly earnings report for the period spanning November 2024 to January 2025, where both revenue and earnings per share surpassed Wall Street expectations. Notably, the data center AI chip segment, which dominates Nvidia’s revenue stream, saw a staggering 93% year-over-year surge, reinforcing its dominance in the AI hardware market. So, why did Nvidia stock plummet despite these blockbuster earnings and a promising profit margin? A closer look reveals a mix of lowered profit margin expectations, emerging AI efficiency trends, and shifting investor sentiment as the key drivers behind this unexpected market reaction.

The primary catalyst for the Nvidia stock price drop appears to be the company’s profit margin outlook for the upcoming quarter (February to April 2025). Nvidia projected revenues exceeding $40 billion with a gross margin of 70.6%, a figure that, while still enviable, falls short of the 75% margin achieved in the previous fiscal year. This decline in profitability expectations sparked concern among investors who have grown accustomed to Nvidia’s consistently high-margin performance, fueled by its near-monopoly in AI chip technology. Analysts point out that the reduced profit margin could stem from increased production costs tied to the rollout of Nvidia’s next-generation Blackwell chips, which CEO Jensen Huang described as experiencing “incredible demand.” Despite Huang’s optimistic remarks and efforts to dispel fears about competition from Chinese AI startup DeepSeek, the lower profit margin forecast overshadowed the positive earnings narrative, triggering a sell-off. For a company that has set the bar extraordinarily high with its meteoric rise in the AI era, even a slight dip in profitability metrics can rattle the market, especially when juxtaposed against its past performance.

Adding to the unease, broader concerns about future AI chip demand began to surface, amplifying the Nvidia stock price decline. The emergence of more efficient AI models, such as those reportedly developed by DeepSeek, suggests that some companies might achieve competitive results with less computational power, potentially reducing reliance on Nvidia’s high-end GPUs (graphics processing units). Summit Insights analyst Kinngai Chan downgraded Nvidia stock to a hold rating, citing this shift as a potential long-term headwind. Chan noted that while data center spending will continue to benefit Nvidia in the near term, the growing focus on inference tasks, which require less computing power than training, could dampen demand for Nvidia’s premium offerings. Furthermore, he predicted that as Nvidia ramps up GPU supply to meet current demand, growth might slow in the second half of 2025, a sentiment echoed by investors wary of saturation risks. This narrative of plateauing demand contrasts sharply with Nvidia’s recent trajectory, where insatiable appetite for AI infrastructure has propelled its valuation to dizzying heights, making any hint of deceleration a red flag for shareholders.

Investor expectations also played a pivotal role in the Nvidia stock market reaction. Despite the company’s stellar quarterly results, some analysts argued that the earnings, while strong, lacked the “blockbuster” flair of previous reports that had consistently shattered forecasts. Scott Welch, an analyst at Certuity Investments, remarked that Nvidia’s performance was solid but didn’t deliver the jaw-dropping surprises investors had come to expect. This perception of “good, but not good enough” fueled a wave of profit-taking, particularly among traders who had anticipated a sharper post-earnings rally. In after-hours trading following the earnings release, Nvidia stock initially dipped slightly before climbing, only to reverse course dramatically during regular trading hours as the profit margin details sank in. The options market had priced in an 8% swing in either direction, reflecting heightened volatility expectations, and the eventual downward move aligned with those projections, underscoring the market’s sensitivity to any perceived shortfall in Nvidia’s growth story.

Delving deeper into the financials provides additional context for the Nvidia stock price drop. In Q4 FY2025 (ending January 26, 2025), Nvidia reported a GAAP gross margin of 73%, down from 76% in the same quarter the previous year. Looking ahead, the Q1 FY2026 forecast of 70.6% represents a further step down, even as revenue is expected to climb to $43 billion. This margin compression, though modest, signals potential cost pressures, possibly linked to scaling Blackwell production or competitive pricing dynamics. Nvidia has emphasized that supply chain bottlenecks for Blackwell have been resolved, setting the stage for a revenue boost later in 2025, yet the short-term profitability hit dominated investor focus. Historical data highlights Nvidia’s margin resilience non-GAAP gross margins peaked at 76.7% in Q4 FY2024 but the current trend suggests a normalization that clashes with the sky-high expectations tied to its AI leadership.

Beyond the numbers, external factors like the DeepSeek AI model efficiency breakthrough added a layer of speculative pressure. While Jensen Huang dismissed immediate threats, suggesting that such advancements could even benefit Nvidia by expanding the AI ecosystem, investors appeared less convinced. The possibility that cheaper, less power-hungry alternatives might erode Nvidia’s market share in the long run introduced a new risk vector, particularly as AI adoption matures and cost efficiency becomes a priority for enterprises. This concern, though speculative, aligns with analyst warnings about a potential demand ceiling, where supply catching up to demand could lead to softer growth a scenario Nvidia has deftly avoided until now.

Ultimately, the Nvidia stock plunge despite a 70% profit margin underscores the delicate balance between exceptional performance and stratospheric expectations. The company remains a titan in the AI chip sector, with its data center business thriving and Blackwell poised to drive future gains. However, the combination of a lower profit margin outlook, whispers of demand shifts, and a market primed for perfection created a perfect storm for the 8.5% drop. For investors and analysts alike, this event serves as a reminder of Nvidia’s vulnerability to sentiment swings, even as its fundamentals remain robust. Moving forward, the focus will likely shift to how Nvidia navigates these profitability challenges and whether it can sustain its growth narrative in an increasingly scrutinized AI landscape.