While Wall Street may be worried about the sustainability of AI spending, a BofA analyst thinks gross margins are more crucial to the stock trajectory.

Amid all the fearful talk on Wall Street about the potential for lower spending on artificial-intelligence infrastructure, one analyst believes Nvidia Corp. investors need to focus on a much more concrete topic: profit margins.

BofA analyst Vivek Arya said in a note to clients that he is focusing on NVIDIA's gross profit margins and their recovery as a key to a meaningful rebound in the stock.

"Nvidia's stock peaked last year (June) right around the time gross margins peaked around 79% in the Hopper product cycle," Arya said. "In hindsight 79% was an abnormally high number," while gross margins in the mid-70% range may be "closer to trend."

Nvidia's gross margin was 73% of revenue in the latest quarter, however, dragged down by the transition to the company's new Blackwell product line.

Shares of Nvidia were trading 6% higher on Wednesday, a further rebound from the declines seen in Monday's market rout. The shares are still down nearly 14% this year.

He added that the recent costs and delays in Nvidia's ramp of its more complex next-generation Blackwell platform required big shifts to overall system design, and changes going forward will be more manageable. He believes its gross margins will hit a trough in the current fiscal first quarter, which ends in April, and that they will expand into the mid-70% range in the second half of the fiscal year.

Arya maintained a buy rating on Nvidia's stock, with a price target of $200. He believes the company can maintain an 80% to 85% share of the market for AI server chips, despite increased competition from application-specific integrated circuits (ASICs) from companies such as Broadcom.

As for the company's big GTC conference next week, Arya said the focus will be on Nvidia's future product pipeline. He thinks the company will "present attractive, albeit well-expected" updates on its forthcoming Blackwell Ultra line and the Rubin product family that will follow. What's more, the company is expected to talk up the longer-term potential of things like autonomous cars and quantum computing.