Shares of Nvidia (NVDA) fell Thursday after the AI ​​chip leader posted better-than-expected results in its second-quarter fiscal 2025 report after the close on Wednesday, but the company’s beat wasn’t as broad as investors have come to expect and management’s guidance was on the light side. Nvidia also reported a sequential decline in gross margin, indicating it may have reached the limits of its margin expansion.

The stock was down 6.4% as of 3:14 p.m. ET, though many of its AI peers, such as Arm Holdings This suggests that some investors saw the report as good news for AI demand in general and took the opportunity to invest in other AI stocks with more upside potential.

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Nvidia plays the expectations game

Nvidia posted another strong quarter, with revenue rising 122% year-over-year to $30 billion and adjusted earnings per share rising 152% to $0.68 for the period ended July 28. Both performances beat analysts’ consensus estimates.

However, gross margin fell from 78.4% to 75.1%, which the company attributed to new data center products and inventory write-downs related to the Blackwell platform. It was the first time Nvidia’s gross margin shrank in the generative AI era, and it appears that margin expansion has likely peaked.

Nvidia’s fiscal third-quarter guidance also seemed to come as a bit of a disappointment. Management had forecast revenue of $32.5 billion, and while that was higher than the consensus figure of $31.8 billion, it would only represent 8% sequential revenue growth.

The company expects to launch its Blackwell platform in the fourth quarter of the fiscal year, which could provide a slight headwind to demand in the third quarter.

Should You Buy The Nvidia Dip?

It makes sense that Nvidia shares are taking a breather. After all, they’re up nearly 1,000% since the start of 2023, shortly after ChatGPT launched.

It now has a market cap of $3 trillion, just behind Apple And Microsoft in the race for the title of most valuable company in the world, and the expected incremental growth it will experience from AI, at least over the next few quarters, is largely baked into its stock price. It trades on a forward P/E ratio of 43, which is expensive, but reasonable.

Thursday’s pullback seems like a good opportunity for long-term investors to buy up Nvidia shares, as the company continues to dominate the AI ​​hardware space. However, investors may also want to take a cue from those exiting the stock and moving into AI alternatives like Arm Holdings.

At a $3 trillion valuation, Nvidia’s upside potential is more limited than that of companies like ARM, especially as gross margins shrink and sequential growth slows.