Nvidia’s recent quarterly forecast did not meet the high expectations set by investors, who had fueled a massive rally in the company’s stock, betting heavily on the future of generative AI technology.
Following the announcement, Nvidia’s shares dropped by 6% in after-hours trading, impacting the stock prices of other chipmakers as well. Despite showing substantial growth and profit, the results were perceived as mixed, leading to uncertainty within the tech sector.
Ryan Detrick, Chief Market Strategist at the Carson Group, commented, “The magnitude of the earnings beat was smaller than what we’ve seen in previous quarters. Even though future guidance was raised, it wasn’t at the level we’ve come to expect. Nvidia is still seeing revenue growth at 122%, but expectations might have been set too high this time around.”
The company’s revenue and gross margin projections for the current quarter were close to analysts’ predictions, falling short of Nvidia’s usual trend of surpassing Wall Street’s expectations. This overshadowed the positive news of a beat on second-quarter revenue and adjusted earnings, as well as the announcement of a $50 billion share buyback.
In the previous three quarters, Nvidia (NASDAQ) experienced over 200% revenue growth, but the company now faces increased pressure as each successful quarter raises investor expectations even further.
CEO Jensen Huang emphasized the strong demand for Nvidia’s graphics processors, which are crucial for generative AI technologies like OpenAI’s ChatGPT. He mentioned during a conference call with analysts that demand continues to grow.
Huang also confirmed that production of Nvidia’s next-generation Blackwell chips has been delayed until the fourth quarter, but he downplayed the impact, noting that customers are still eager to purchase the current-generation Hopper chips. Nvidia expects significant revenue from Blackwell chips later in the year, after sending samples to partners and customers.
Shares of other chipmakers, including Advanced Micro Devices (NASDAQ) and Broadcom (NASDAQ), also saw declines of nearly 4%, while Asian chipmakers SK Hynix and Samsung dropped 4.5% and 2.8%, respectively, during Thursday morning trading.
Investor Concerns Rise Amid Nvidia’s Outlook
Nvidia’s stock, which has surged by over 150% this year, contributing $1.82 trillion to its market value and driving the S&P 500 to new heights, could face a significant setback if the after-hours losses continue. A drop in Nvidia’s market value could fuel fresh concerns about the slow returns on generative AI investments, potentially causing tech giants to reconsider their substantial spending on data centers. These concerns have already begun to affect the AI rally in recent weeks.
Nvidia’s largest customers, including Microsoft (NASDAQ), Alphabet (NASDAQ), Amazon (NASDAQ), and Meta Platforms (NASDAQ), are projected to spend over $200 billion on capital expenditures in 2024, primarily to build AI infrastructure. Following Nvidia’s report, shares of these companies dipped slightly in after-hours trading.
eMarketer analyst Jacob Bourne noted, “The market’s reaction reflects growing investor anxiety about the long-term sustainability of the generative AI sector, with Nvidia’s performance being a major influence.”
Additionally, Nvidia is under scrutiny from regulators regarding its practices. The company disclosed in its quarterly filing that it has received inquiries from regulators in the U.S. and South Korea concerning its GPU sales, supply allocation efforts, and partnerships related to foundation models. Nvidia had previously reported similar inquiries from the EU, UK, and China.
Recent reports indicate that France’s antitrust regulator may charge Nvidia with anticompetitive practices, and U.S. regulators are reportedly investigating whether the company is bundling its networking equipment with its in-demand AI chips.
For the third quarter, Nvidia expects an adjusted gross margin of 75%, with a margin of error of 50 basis points. Analysts forecasted a gross margin of 75.5%, slightly above Nvidia’s second-quarter margin of 75.7%.
Nvidia’s gross margins remain higher than those of its competitors, supported by the premium prices of its advanced chips. AMD, for instance, recorded an adjusted margin of 53% in its fiscal second quarter.
The company projects third-quarter revenue of $32.5 billion, with a possible variance of 2%, compared to analysts’ expectations of $31.77 billion, according to LSEG data. In the second quarter, Nvidia reported revenue of $30.04 billion, surpassing estimates of $28.70 billion, and achieved earnings of 68 cents per share, exceeding the predicted 64 cents.
Nvidia’s data center segment saw a 154% increase in revenue, reaching $26.3 billion in the second quarter, above the estimated $25.15 billion and marking a 16% rise from the first quarter. The company also generates revenue from selling chips to the gaming and automotive industries.
