Nvidia Gross Margin Forecast Falls to 71-72% as Memory Costs Rise

Record revenue, with a catch on margins

Nvidia's August earnings report had all the usual records: revenue up more than 100%, a guide past $100 billion for the first time, and a full-year outlook given further ahead than the company has gone before. The most closely watched number was a smaller one. Management told investors that gross margin, which has defined Nvidia's run, will fall over the next two quarters before it recovers.

For the second quarter of fiscal 2027, which ended July 26, 2026, Nvidia reported revenue of $96.2 billion. That was up 106% from a year earlier and 18% from the prior quarter. Data Center revenue was $89.0 billion, up 117%.17 Gross margin came in at 75.0% on both a GAAP and non-GAAP basis, exactly where the company had guided.1719 Non-GAAP earnings of $2.22 per share beat estimates of about $2.08 to $2.09. Revenue beat consensus of roughly $92.4 billion.1419

The forward guidance is where the story shifts. For the third quarter, Nvidia expects revenue of $108 billion, plus or minus 2%, and GAAP and non-GAAP gross margins of 74.0%, plus or minus 50 basis points.1217 Several outlets report that management went further on the call. It said gross margin should bottom at 71% to 72% in the fourth quarter, then recover to 72% to 73% in fiscal 2028.111214 Put simply, about three to four points of margin will disappear over two quarters, and only some of it is expected to come back.

Memory costs are the cause

Coverage agrees on why. Management pointed to what it called "extreme pricing conditions in memory."18 Several reports blame higher DRAM and high-bandwidth memory costs that are built into new product configurations.111415 HBM is a major input for Blackwell and the architectures after it, and suppliers have raised prices sharply because production has not kept up with demand from AI data center buildouts.11

There is one difference in how the reports handle the cause. FinanceFeeds noted that the earnings release gives the 74% figure without explaining it. The memory explanation comes from the call and from wider industry pressure, not the formal outlook table.19 The same outlet had reported days earlier that Nvidia told customers it would raise AI server prices by more than 15% because of soaring memory costs.19 That fits with another report that margins should recover to 72% to 73% only once price increases take effect in the first quarter of fiscal 2028.12

The memory side of the trade is easy to see elsewhere. Micron's fiscal third-quarter 2026 revenue reached $41.46 billion as HBM4 production ramped.13 In this part of the cycle, a growing share of the profit from AI hardware is going to memory makers, and Nvidia's guide is one of the clearest signs of it.

Is this a pricing problem or a cost problem?

On this question, the commentary splits in a way that matters for investors.

One camp reads the compression as purely a cost problem. One analysis argues it has nothing to do with weaker GPU pricing or tougher hardware competition.11 In this reading, Nvidia is absorbing a temporary jump in input costs while demand still exceeds supply, and margins should recover as memory makers add capacity.11

The other camp sees a link to competition. One forecast expects margins to settle near 71% to 72% as Nvidia gives up some margin for volume in the face of custom chips, and calls that the sign of a mature franchise defending itself.5 Bearish analysts have also named rising competition in inference workloads from custom silicon, including OpenAI's Jalapeño chip, as a separate risk.14

The cost explanation fits the evidence better for now. Nvidia's own outlook calls fiscal 2028 revenue growth of about 70% supply-constrained and says underlying demand is closer to doubling.1112 A company that can't meet demand is rarely cutting prices to win share. The server price increase also points to Nvidia passing costs on, not absorbing them.19 The more important test is whether it can pass on all of them. One analysis put it plainly: whether the fiscal 2028 price increases fully stick will decide whether memory inflation stays a temporary hit or becomes lasting erosion.12

How low is 71%?

The trough sounds worse without context. Nvidia's GAAP gross margin for all of fiscal 2026 was 71.1%, down from 75.0% the year before.1 That figure was dragged down by a $4.5 billion H20 inventory charge after export controls. First-quarter fiscal 2026 margin was 60.5% on a GAAP basis, or 71.3% non-GAAP without the charge.3 Through the rest of that year, management kept promising a return to the "mid-70s" and delivered it. Margin rose from 72.4% to 73.4% to 75.0% by the fourth quarter.2410

So the coming fourth-quarter trough would put Nvidia about where it was during last year's export-control disruption, not in new territory. The 74% third-quarter guide is still slightly above the 73.6% non-GAAP margin from the same quarter a year earlier.9 Still, the guide breaks a promise. Before the report, investors wanted to hear management reaffirm mid-70s margins despite rising memory costs.9 Gabelli Funds analyst Ryuta Makino had expected margins to stay in that range for the fiscal year.9 By that standard, Johnson Investment Counsel's Brandon Zureick called the 74% guide "a hair light" and said it likely reflects early memory cost inflation.9 The fourth-quarter trough goes well past that.

The dollars add up. At $108 billion of quarterly revenue, each point of gross margin is worth more than $1 billion of gross profit.19 Even so, operating leverage is huge. GAAP operating income was $63.7 billion last quarter, about two-thirds of revenue.17 A few points of gross margin squeeze that cushion but don't threaten it.

How the stock reacted

Accounts of the stock's reaction don't fully line up, which shows how mixed the market's read was. FinanceFeeds headlined that the margin guide sent shares lower. Its own figures show the stock up about 4% after hours, near $218, after closing down 1.6% at $209.66.19 Over the following weeks, Nvidia gained 8.3% since the August 26 guidance, compared with 1.1% for the S&P 500, and traded at $230.48 as of early October.15

That gain is modest next to the earnings. Over the past year, shares rose about 29.5% while quarterly net income grew about 126%.18 Valuation estimates vary by method: about 25 times annualized non-GAAP earnings by one count17, 23.5 times trailing by another14, and about 18 times forward earnings by a third.18 Analysts have kept raising estimates anyway. The fiscal 2028 EPS consensus reportedly rose from about $13.13 to $15.68 in 30 days, with 42 upward revisions and no cuts.18

The gap between profit growth and share price suggests investors are discounting the risks around margins. Hold-rated analyst Vladimir Dimitrov warned that margin expectations under current memory prices could weigh on the stock in the coming months.14

The other risks

Margins aren't the only concern. Days sales outstanding rose to 60 from 45, and management acknowledged that "some will call this circular financing."18 Free cash flow in the second quarter was $21.34 billion against GAAP net income of $59.69 billion, a gap some analysts flagged.14 Nvidia has invested close to $50 billion in frontier AI labs and expects them to make up about a quarter of its business next year.20 Supply commitments reached $279 billion.18 Bulls see that as locked-in visibility; skeptics see a heavier balance sheet.14

The main uncertainty in the margin guide sits here too. Recovery depends on two things Nvidia doesn't fully control: memory makers adding capacity, and customers accepting higher prices.1112 If AI labs funded partly by Nvidia's own investments are among the buyers, the pricing power behind the recovery becomes harder to judge from outside.

What to watch

The third-quarter report in November will test both the $108 billion revenue guide and the 74% margin.17 The bigger test is the fourth quarter. If margin lands at the 71% to 72% floor and early fiscal 2028 commentary confirms the price increases are sticking, this will look like a well-flagged cost cycle that a supply-constrained company can manage.1218 If margin falls below the floor, or recovery stalls under 72%, the competition argument gets more credible.514

Our read is that Nvidia is paying for its own boom. AI demand has created a memory shortage, and the shortage is now cutting into the margins of the company at the center of that demand. Nvidia's choice to flag the trough early, by giving a quarter-by-quarter margin path and a full-year revenue outlook, is a sign of confidence.1220 It also makes margin recovery the main promise investors will hold the company to.