Morgan Stanley: NVIDIA's earnings report is not perfect, but the "growing pains" of the transition period are fading, and Blackwell is about to experience a full explosion

AI chip giant NVIDIA's Q4 performance was strong, but the robust results did not significantly boost its stock price, with NVIDIA's shares slightly declining in after-hours trading, while Morgan Stanley remains confident about NVIDIA's future.

In its latest report on Thursday, Morgan Stanley pointed out:

This financial report is "not perfect." Despite some challenges, such as gross margin pressure and export controls, these factors are temporary and will not change NVIDIA's long-term growth trajectory.

With Hopper architecture chips still dominating and Blackwell architecture chips facing complex challenges, NVIDIA still achieved nearly $2 billion in unexpected growth, which is unprecedented in the semiconductor industry.

NVIDIA's transitional issues are gradually fading, and the full outbreak of Blackwell is imminent, with strong demand driving the company's performance to continue growing.

Therefore, Morgan Stanley believes NVIDIA will continue to maintain its leading position in the AI chip field and has reiterated its "Overweight" rating on NVIDIA, raising the target price to $162, which still has a 23% upside potential compared to the current price.

Regarding market concerns about the sustainability of AI spending, Morgan Stanley believes that AI spending is not a bubble but cyclical. The shortened delivery cycles last year and the recent challenges faced by Blackwell are not signs of the end of the cycle, and it expects market enthusiasm to reignite in the next 6-9 months.

Transitional issues are gradually fading, and the full outbreak of Blackwell is imminent

In analyzing NVIDIA's financial report, Morgan Stanley first emphasized its "unprecedented" growth rate:

NVIDIA is in a product transition period. The previous generation Hopper architecture chips still account for two-thirds of data center business revenue, while the new generation Blackwell architecture chips face "unprecedented complexity." Nevertheless, NVIDIA still achieved an 18% quarter-over-quarter growth, exceeding expectations by $2 billion, which is unprecedented in the history of the semiconductor industry.

NVIDIA's newly launched Blackwell chip series achieved a shipment value of $11 billion in the first quarter, far exceeding the market estimate of $3.5 billion. Compared to its trillion-dollar tech peers, NVIDIA's growth rate is remarkable. The average revenue growth rate for Apple, Microsoft, Amazon, Meta, and Google's parent company Alphabet in the December quarter last year was 11.8%.

Morgan Stanley's research report further pointed out that demand for Blackwell will remain strong, with demand growth fully ramping up:

Demand for Blackwell remains strong and will continue until the end of the year. Statements from major tech companies during earnings call conferences, as well as comments from key technology experts, confirm this.

As inference workloads continue to increase, Blackwell architecture chips will play an increasingly important role in the AI field. Moreover, contrary to market concerns, the growth in inference demand does not seem to negatively impact training demand. **

Gross Margin May Only Be Temporarily Under Pressure

Regarding the market's concern about gross margin, Morgan Stanley believes:

Gross margin may be temporarily under pressure, mainly due to the additional costs incurred during the accelerated advancement of Blackwell architecture chips, such as shorter testing processes and higher wafer costs. Additionally, the startup costs for new product forms are also relatively high.

However, Morgan Stanley points out that these factors affecting gross margin seem to be temporary. NVIDIA's management is confident that gross margin will recover to 75%. Morgan Stanley expects that the gross margin in the second quarter of 2025 will be similar to that in the first quarter and will gradually rebound in the second half of the year.

Moreover, according to media analysis, even if NVIDIA expects the gross margin to be around 70% at the beginning of the new fiscal year, it is still much higher than most other chip companies. According to data from S&P Global Market Intelligence, the average gross margin of the 30 companies in the PHLX Semiconductor Index over the past year was 51.5%.

AI Spending is Cyclical, Market Enthusiasm Will Reignite in 6-9 Months

Based on confidence in strong demand for Blackwell and the sustainability of the AI spending cycle, Morgan Stanley has raised its revenue expectations for NVIDIA:

The revenue expectation for fiscal year 2026 (calendar year 2025) has been raised to $196.746 billion, and the year-on-year growth rate for fiscal year 2027 has been raised from 14.6% to 17%, while maintaining a year-on-year growth rate of about 15% for fiscal year 2028.

Overall, Morgan Stanley believes that AI spending is not a bubble but cyclical, and market enthusiasm will reignite in the next 6-9 months:

The market often seizes on any signs that customers may reduce spending anywhere, interpreting it as a signal of the end of the cycle. However, the shortened delivery cycles from last year and the recent challenges faced by Blackwell are not signs of the end of the cycle.

Although market sentiment has cooled, they expect Blackwell to experience strong growth in the second half of 2025. With upward revisions to earnings forecasts and stock price consolidation, the price-to-earnings ratio will continue to compress, and market enthusiasm is expected to reignite in the next 6-9 months.

Looking ahead, tech giants plan to invest heavily in AI capital expenditures this year, which may alleviate some concerns. In addition, NVIDIA needs to demonstrate how it will continue to develop based on its already strong competitive advantage, which will be a major topic at NVIDIA's GTC conference in March, expected to focus on follow-up products after the Blackwell series