NVIDIA's Gross Margin Outlook Brightens, Goldman Sachs Raises Target Price to $300

NVIDIA (NVDA-US) delivered financial results and operational guidance that surpassed market expectations. Goldman Sachs stated that with the company now clearly outlining the timing of gross margin bottoming and recovery, the biggest market concern—margin pressure—could finally be "resolved." The firm reiterated its "Buy" rating on NVIDIA and raised its 12-month target price from $285 to $300, implying approximately 38% potential total return.

NVIDIA's second-quarter revenue reached $96.2 billion, exceeding Goldman Sachs' estimate of $93.1 billion and the market consensus of $92.4 billion, representing a 106% year-over-year increase. Data center revenue was $89 billion, above Goldman's forecast of $86.5 billion. Edge computing revenue was $7.2 billion, also surpassing Goldman's and market expectations of $6.5 billion.

Profitability remained strong. NVIDIA's non-GAAP gross margin for Q2 was 75%, in line with Goldman's forecast and slightly above the market's 74.8% expectation. Operating margin reached 66.5%, slightly exceeding forecasts. Earnings per share (EPS) were $2.22, above Goldman's estimate of $2.12 and the market's $2.09.

2027 Outlook Significantly Exceeds Expectations

NVIDIA projected annual revenue growth of 70% for 2027, significantly higher than Goldman's prior estimate of 55% and far above the market's average expectation of 44%, aligning with the most optimistic buy-side forecasts. The company added that without supply constraints, potential demand growth could exceed 100%, but supply bottlenecks will continue to limit shipment volumes over the next 18 months.

Goldman estimates this outlook implies an additional $250 billion in cumulative revenue on top of NVIDIA's original $1 trillion target for Blackwell, Blackwell Ultra, and Rubin products from 2025 to 2027.

Rubin product ramp-up will be a key revenue driver. Management expects Rubin shipments to account for approximately 20% of projected revenue in Q3. Goldman believes this demand outlook indicates accelerating procurement from new customer segments beyond large cloud providers, including AI labs, emerging cloud service providers, and sovereign clients.

Demand for Vera CPU standalone racks remains strong, partly driven by agent-based AI applications. NVIDIA maintains its forecast of $20 billion in CPU-related revenue by 2026 and expects CPU shipments to grow over 100% in 2027.

Gross Margin Concerns 'Resolved'

Gross margin was the primary market concern ahead of the earnings release. NVIDIA forecast Q3 non-GAAP gross margin at 74%, below Goldman's and market expectations of around 74.9%, primarily due to rising HBM memory costs and initial production ramp of Rubin products.

The company expects gross margin to bottom at 71%–72% in Q4 before recovering in 2027 and stabilizing at 72%–73%. While this is below the market's prior 2027 estimate of 75.1%, Goldman views the overall outcome as in line with expectations and even better than some investors' pessimistic assumptions.

Goldman noted that given the market's high anxiety over margin decline, NVIDIA's clear communication on the bottoming timeline and recovery path could eliminate the biggest uncertainty, serving as a "cleansing event" for the stock. NVIDIA also stated it has implemented pricing measures to partially offset cost pressures from rising HBM memory prices.

Financial Commitments Enhanced Transparency

NVIDIA also disclosed detailed financial commitments from customers totaling $366 billion, including $279 billion in supply and capacity commitments, primarily related to memory; $29 billion in cloud service agreements; $25 billion in data center leases; $25 billion in equity investments; and $5 billion in capital expenditures. Additionally, guarantees related to data center land, power, and infrastructure for SoftBank's energy and AI cloud business amount to another $108.5 billion.

Furthermore, NVIDIA detailed its $500 billion financing platform announced on August 10 with financial partners, aimed at supporting AI labs, enterprises, and AI cloud providers in building infrastructure at competitive interest rates. NVIDIA may provide up to 25% residual value support for specific projects, subject to case-by-case evaluation.

Goldman believes this information helps investors better assess NVIDIA's financial risks. Management reiterated its commitment to return over 50% of excess free cash flow to shareholders and emphasized the ability to sustain this even in a downturn scenario.

Goldman Raises Target Price to $300

Based on stronger-than-expected Q2 results and an upward revision to the 2027 outlook, Goldman raised its 2027 and 2028 EPS estimates for NVIDIA to $16.70 and $23.00, respectively—an average increase of about 9%. The higher revenue base contributes positively, partially offset by downward revisions to margin forecasts.

Goldman raised its 12-month target price from $285 to $300, maintaining a constant 30x P/E multiple applied to a normalized EPS estimate raised to $10.00. In a bull case, the target could reach $424; in a bear case, it would be $175.

NVIDIA's midpoint Q3 revenue guidance is $108 billion, slightly below Goldman's $110.7 billion estimate but above the market's $104.6 billion. Implied non-GAAP EPS is $2.43, also above the market's $2.32.

Goldman believes this guidance reflects a robust AI infrastructure spending environment, with gross margin uncertainty gradually resolving and growth outlooks revised upward, providing stronger support for NVIDIA's valuation.