Key points
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Artificial intelligence stocks have come under increased scrutiny in recent months due to high valuations, high infrastructure spending and whether returns will justify these investments.
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Nvidia recently reported excellent quarterly results and provided strong guidance.
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Shares sold off sharply the day after the report, suggesting other factors are at play.
After investors eagerly awaited the arrival of the artificial intelligence giant last week Nvidia (NASDAQ: NVDA) To deliver its fourth-quarter fiscal 2026 report, the company provided them with better-than-expected results and gave better-than-expected guidance for the current quarter. In addition, gross margin expectations were solid.
Still, the stock fell nearly 5.5% on February 26, the day after the report. Here’s what Nvidia’s blockbuster district and Wall Street’s response to it tell us about the state of the stock market and artificial intelligence trading.
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What more can investors ask for?
Nvidia reported adjusted earnings per share of $1.62 on revenue of $68.1 billion, easily beating the $1.53 earnings per share on revenue of $66.2 billion that Wall Street analysts had expected. Additionally, management expected revenue of approximately $78 billion for the current quarter. Analyst consensus estimates had forecast only $72.6 billion. Furthermore, this guidance figure does not take into account any assumptions about revenues from chip sales in China.
Person looking intently at laptop.
Image source: Getty Images.
Nvidia also targeted a full-year gross margin of around 75%, after achieving an adjusted gross margin of 75.2% last quarter, indicating the company is maintaining its strong pricing power.
CFO Colette Kress also said customers are excited to get their hands on the company’s next-generation AI platform, Vera Rubin, which will succeed the current Grace Blackwell platform. The first Vera Rubin samples have been sent to a number of customers and Nvidia expects to start production in the second half of the year.
“We’re not sure what else investors want to hear at this point,” Bernstein analyst Stacy Rasgon said in a research note after the earnings release. “We imagine the sheer magnitude of the numbers may have shocked investors a little.”
The market is more uncertain than ever about AI
After a blowout quarter, you’d think Nvidia would be trading at least slightly higher. The stock hasn’t performed particularly well so far in 2026, though it’s still up over 42% over the past year. Nvidia now trades at a pretty reasonable 24 times forward earnings, considering it has grown its revenue 73% year over year and nearly doubled its profits.
So what gives? Well, I think that tells you how conflicted the market is now about AI. One question is whether the hyperscalers, including Microsoft, Metaplatforms, AlphabetAnd Amazon, will continue to spend as freely as they have. Together, these “Magnificent Seven” companies will guide a total of $650 billion to $700 billion in capital expenditures by 2026, largely to fund AI infrastructure.
The question is: what will happen after this year? Some think AI investments may slow due to limitations on computing capacity, power supplies, rising memory prices, or concerns about whether returns on those investments will justify those investments. That could be a big problem for Nvidia, which just said hyperscalers account for more than half of its data center revenue.
After all, many CEOs and experts have publicly said that companies can’t possibly earn good returns at this level of investment, yet hyperscalers are still leading the way because they don’t want to fall behind their rivals in what some have called the Fourth Industrial Revolution.
Ultimately, the market’s bizarre reaction to Nvidia’s latest report, in my opinion, shows just how uncertain investors are about the future of AI. Not long ago, a Substack think piece from Citrini Research, a small market research firm, essentially modeled a scenario in which AI outperforms expectations, becomes so productive that it eliminates many high-paying jobs, significantly increases unemployment, and drops the market by as much as 38% between now and June 2028. Apparently, many people on Wall Street took note of the Citrini piece – which the company explicitly described as “a scenario, not a prediction” – and the market took a major hit. as a result.
It’s rare for a Substack piece to cause such a big market move. The fact that they appear to have done so in this case illustrates that investors do not believe they can reasonably predict what will happen. Nvidia’s recent earnings and the market’s reaction to them further highlight this conundrum.
Should You Buy Nvidia Stock Now?
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Bram Berkowitz has no positions in the stocks mentioned. The Motley Fool holds positions in and recommends Alphabet, Amazon, Meta Platforms, Microsoft and Nvidia. The Motley Fool has a disclosure policy.
