Credit also needs to be given to Nvidia’s CUDA software platform for its virtually textbook operating expansion. CUDA is the toolkit developers use to maximize the potential of their Nvidia GPUs, including building large language models. This platform has helped keep clients loyal to Nvidia’s umbrella of products and services.

Although everything seems to be going perfect for Nvidia, as its stock performance would suggest, one metric in the company’s recently released third-quarter operating results (for the quarter ended Oct. 27) tells a different story.

As expected, Nvidia’s headline figures look as good as advertised. Quarterly sales jumped 94% from the year-ago quarter to $35.08 billion, while net income surged 109% to $19.3 billion. Both were well ahead of Wall Street’s consensus forecast.

But there is one exceptionally important figure that’s showing signs of weakness, and it foreshadows the very real possibility of the top being in for Nvidia stock.

When Nvidia lifted the hood on its first-quarter operating results in May, it reported a scorching-hot gross margin of 78.4%. The dramatic increase the company has enjoyed in its gross margin is a function of AI-GPU scarcity and its aforementioned exceptional pricing power.

However, the tide is turning. After delivering a 78.4% gross margin in Q1 2025, Nvidia reported a gross margin of 75.1% in Q2 2025 and 74.6% in the latest quarter. For the fiscal fourth quarter, it’s forecasting a gross margin of 73% to 73.5%, +/- 50 basis points.

Although Nvidia’s gross margin is notably higher now than it was prior to the AI revolution taking shape, this steady decline we’re witnessing is evidence that AI-GPU scarcity is waning and competition is picking up.

Most of Wall Street is focused on the external competition Nvidia is going to have to contend with. AMD has been steadily ramping up production of its MI300X AI-GPUs and recently unveiled its next-gen MI325X chip, which it intends to put into production before the end of the year. AMD is a brand-name company with a rich history and a considerably cheaper AI-GPU than Nvidia’s Hopper and Blackwell chips. Businesses wanting to gain first-mover advantages may be compelled to skip the potentially long wait for Nvidia’s hardware and choose AMD.

But the bigger issue for Nvidia may very well be the competition it’s facing from within. Many of the company’s top customers by net sales are members of the “Magnificent Seven,” and they’re all internally developing AI-GPUs to deploy in their data centers. Even if these chips come up short to Nvidia’s hardware in terms of computing capabilities, they’re still markedly cheaper and more easily accessible.

Anything that reduces AI-GPU scarcity is going to adversely impact Nvidia’s pricing power and its gross margin.

Based on the trend we’re seeing from Nvidia’s gross margin, its shares have likely topped. But history would like a word, as well.

Even though the internet transformed the business world three decades ago, it took time for the technology to mature and for businesses to properly utilize it to generate a positive return on their investment. Every next-big-thing innovation for 30 years, including the internet, has worked its way through an early innings bubble-bursting event.

What this tells us is that investors consistently overestimate how quickly a new technology will be adopted by consumers and/or businesses on a broad basis. It also suggests investors are overly optimistic about the utility of cutting-edge technologies. Though artificial intelligence can be every bit the gamechanger that Wall Street expects it to be, it’s going to take time for businesses to figure out how best to utilize AI. This is what leads to lofty expectations eventually falling short.

Investors are seeing this dynamic play out right in front of their eyes. Even with sizable investments in AI data centers from some of Wall Street’s most-prominent companies, most of these businesses lack a clear game plan to generate a positive return on their AI investments any time soon. The utility aspect of AI isn’t well understood at the moment — and that’s a scary thing for a company whose gross margin is in a decisive decline.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.

Has Nvidia Stock Topped? A Single Metric Offers a Very Clear Answer. was originally published by The Motley Fool