Investing.com -- Nvidia (NASDAQ:NVDA)'s gross margins have been under scrutiny, but according to Morgan Stanley (NYSE:MS) analysts in a note to clients on Monday, the concerns are largely overblown.
While Nvidia's margins are expected to experience slight pressure, the bank's analysts stress that this is part of a strategic shift to maintain dominance in the AI processor market.
Morgan Stanley notes that Nvidia's decision to adopt a more aggressive product positioning and annual product cadence is a key factor in this margin pressure.
"Nvidia gross margins are likely to come down slightly, but the concerns are overblown in our view," the analysts stated, adding that the company is focused on offering value while preventing competitors from gaining a foothold in the market.
"There are several potential puts and takes on gross margins, but the biggest will be the decision to move to a more aggressive product positioning, including the annual product cadence, and the decision to price Blackwell for good value," adds the bank.
They expect Nvidia's gross margins to dip from 76% to around 74.5%. "The ability to put pressure on the entire competitive set by reducing GMs from 76% to 74.5% seems a good tradeoff," writes Morgan Stanley.
One significant factor impacting margins, as noted above, is the introduction of the new Blackwell chips. Morgan Stanley acknowledged that Blackwell will have lower gross margins than its predecessor, Hopper, primarily due to yield issues in the early production stages.
The delay from rev 0 to rev 1 of Blackwell silicon "was driven by low yields on rev 0," resulting in a higher-than-usual inventory reserve.
Despite these challenges, Morgan Stanley believes Nvidia will maintain a robust market share, likely exceeding 85% of AI processors this year, with further growth anticipated in 2025.
While the company is guiding for "mid-70s" gross margins for the full year, Morgan Stanley believes this is overly conservative, and the margin pressures are part of Nvidia's broader strategy to dominate the AI ecosystem.