Nvidia’s AI chips face critical production hurdles, with soaring demand outpacing supply due to advanced packaging challenges. Analysts foresee persistent bottlenecks into 2025, reshaping the competitive landscape.
Nvidia’s AI Chip Demand and Supply Struggles
Per Yahoo Finance, the artificial intelligence boom may be coming to an end, according to Nvidia's sales projection released on Wednesday. Nonetheless, investors, analysts, and company leaders all say no.
In wildly fluctuating trading, the chipmaker's shares fell roughly 2% after rising over 4% to a record high on Thursday. AMD, a competitor in artificial intelligence chips, Intel, and Qualcomm all saw declines.
Revenue Growth Hits a Snag Amid Supply Chain Constraints
Nvidia, the biggest publicly traded firm in the world, is selling its improved processors at a rate faster than its chipmaking contractor, Taiwan Semiconductor Manufacturing Co., Ltd. (TSMC), can produce them. Many companies are eager to use these chips to build new AI systems.
On Wednesday, Nvidia predicted the slowest revenue increase in seven years and indicated that for multiple quarters in fiscal 2026, demand would outstrip supply due to supply chain limitations. The company makes semiconductors.
Advanced Packaging Challenges Slow Blackwell Chip Production
Analysts have mainly put the anticipated slowdown down to the "law of large numbers" since Nvidia's skyrocketing growth makes year-on-year comparisons difficult. This comes after a surge in investment in AI infrastructure following the debut of OpenAI's ChatGPT in late 2022.
A representative from International Data Corp named Mario Morales stated, "There is no competitor that can match the performance specs of Blackwell," in reference to Nvidia's new flagship chip. "Customers will wait until supply improves."
It is already difficult to make these chips, and a summer defect in one of Nvidia's chips isn't helping matters.
Mask Change and Yield Losses Add to Production Delays
Blackwell requires a complicated procedure known as advanced packaging to assemble its many components. Even while TSMC is working feverishly to increase capacity, Nvidia and other chip firms are still struggling with packaging.
"Blackwell adds more advanced packaging from TSMC than prior chips, which adds a wrinkle," commented Ben Bajarin, CEO and primary analyst at research firm Creative Strategies. In his estimation, Nvidia would have demand exceeding supply throughout the entire year of 2025.
Nvidia used the term "mask change" to describe the action company took in response to the Blackwell design defect. According to CEO Jensen Huang, Blackwell's chip yields—the percentage of chips that are fully functional when they come off the production line—were decreased by the now-fixed defect.
Analysts Warn of Bottleneck Risks and Financial Strains
Even though Nvidia didn't specify the problem, making a complicated chip like Blackwell—which involves hundreds of manufacturing steps—can take months. A lot of these processes include printing the chip—or at least projecting an image of its circuitry onto a silicon disc—by shining ultraviolet light through a succession of intricate masks.
According to analysts, Nvidia's production deadlines were impacted and the company lost money due to the mask change.
"There's the risk that the bottlenecks worsen rather than improve, and that could damage revenue projections," warned Michael Schulman of Running Point Capital.
Production Ramp-Up Faces Margin Pressures
Executives from Nvidia informed investors on a conference call that the firm has shipped over 13,000 samples of its new technology and anticipates sales of several billion dollars this quarter, surpassing its early projections.
"We're at the beginning of our production ramp, which always comes with opportunities for yield improvement," Huang told Reuters on Wednesday. "We are ramping Blackwell from zero to something extremely large. By definition, the laws of physics would say that there's a limit to how fast you can ramp."
The manufacturing ramp-up is anticipated to put a strain on gross margins in the near future.
Long-Term Demand Outpaces Short-Term Challenges
The executives at Nvidia cautioned investors that until production issues are resolved, the company's margins will fall to the low 70% area, a decline of several percentage points.
Shares of Nvidia were held by Gabelli Funds portfolio manager Hendi Susanto, who stated categorically that demand for Nvidia's chips would continue to be "absolutely and exceptionally strong" for the time being.
"The key focus is supply - how much supply Nvidia can produce," stated the CEO.