Nvidia’s Quarterly Forecast Disappoints Some Investors Despite Strong Growth

Nvidia’s latest quarterly forecast fell short of the high expectations set by investors, who have been fueling a significant rally in its stock price, betting heavily on the future of generative artificial intelligence (AI). The chipmaker’s shares dropped by 6% in after-hours trading, pulling down other chipmakers’ stocks as well. Although Nvidia reported impressive growth and profits, the results were considered mixed by some market analysts.

Ryan Detrick, chief market strategist at Carson Group, summed up the situation: “The size of the beat this time was much smaller than we’ve been seeing.” He noted that while Nvidia did raise its future guidance, it wasn’t by the same margin as in previous quarters. “This is a great company that is still growing revenue at 122%, but it appears the bar was just set a tad too high this earnings season,” Detrick added.

While the company’s revenue and gross margin forecasts for the current quarter were in line with analysts’ expectations, they didn’t live up to its recent history of outperforming Wall Street targets. This overshadowed a strong performance in the second quarter, which included a $50 billion share buyback.

For the past three consecutive quarters, Nvidia achieved revenue growth exceeding 200%. However, as each quarter’s success prompts Wall Street to raise expectations even higher, the company faces increasing pressure to continue its streak of surpassing estimates.

Nvidia’s CEO, Jensen Huang, emphasized the ongoing strong demand for the company’s high-performance graphics processors, which are central to generative AI technologies like OpenAI’s ChatGPT. “You have more on more on more,” he told analysts, describing the growing demand during a conference call.

Huang also confirmed that the production of Nvidia’s next-generation Blackwell chips has been delayed until the fourth quarter, but downplayed the potential impact, noting that customers are eagerly buying the current-generation Hopper chips. Nvidia is already shipping samples of Blackwell chips to its partners and expects these chips to generate several billion dollars in revenue by the fourth quarter.

The news caused shares of other chipmakers, such as Advanced Micro Devices and Broadcom, to drop nearly 4%, while Asian chipmakers like SK Hynix and Samsung also saw declines of 4.5% and 2.8%, respectively, in Thursday morning trading in Asia.

Investor Jitters Over Generative AI Payoffs

A lot is riding on Nvidia’s outlook, as its stock has surged more than 150% this year, adding $1.82 trillion to its market value and lifting the S&P 500 to new highs. However, if the after-hours losses continue, Nvidia could lose $175 billion in market value.

The forecast has raised fresh concerns about slower returns from investments in generative AI. Some investors worry this could prompt tech giants to reconsider the billions of dollars they are spending on data centers. Such concerns have already impacted the AI market rally in recent weeks.

Nvidia’s biggest customers—Microsoft, Alphabet, Amazon, and Meta Platforms—are expected to spend more than $200 billion on capital expenditures in 2024, primarily on building AI infrastructure. Shares of these companies dipped slightly in after-hours trading on Wednesday.

Jacob Bourne, an analyst at eMarketer, noted, “It’s a reflection of growing investor jitters about the long-term viability of the generative AI market, with the entire market seemingly hinging on Nvidia’s performance.”

Regulatory Scrutiny Adds to Nvidia’s Challenges

Nvidia is also under regulatory scrutiny regarding its business practices. In its recent quarterly filing, the company disclosed that it had received requests for information from regulators in the U.S. and South Korea about its sales of GPUs, efforts to allocate supply, foundation models, and investments and partnerships with companies developing foundation models. Previously, inquiries were only noted from the EU, UK, and China.

Last month, Reuters reported that France’s antitrust regulator was preparing to charge Nvidia with alleged anticompetitive practices. Additionally, a media report suggested that U.S. regulators were investigating whether Nvidia was bundling its networking equipment with its highly sought-after AI chips.

Financial Performance Remains Strong

Despite these challenges, Nvidia’s financial performance remains robust. The company expects an adjusted gross margin of 75%, plus or minus 50 basis points, for the third quarter, aligning closely with analysts’ forecasts of 75.5%. In the second quarter, Nvidia reported a gross margin of 75.7%, slightly above the average estimate of 75.8%. Its margins continue to outshine those of competitors like AMD, which reported an adjusted margin of 53% for its fiscal second quarter.

For the third quarter, Nvidia forecasts revenue of $32.5 billion, plus or minus 2%, compared to the analysts’ average estimate of $31.77 billion. The company’s second-quarter revenue reached $30.04 billion, surpassing estimates of $28.70 billion. Excluding certain items, Nvidia earned 68 cents per share in the second quarter, beating the forecasted 64 cents.

Notably, sales in Nvidia’s data center segment grew 154% to $26.3 billion in the second quarter, exceeding estimates of $25.15 billion, and increasing 16% from the first quarter. Nvidia also generates revenue by selling chips to gaming and automotive companies.

Note: This report is based on general market analysis and recent news reports.