Written by Archia Bajwa
(Reuters) – Nvidia Corp’s quarterly outlook on Wednesday failed to meet the lofty expectations of investors who have driven a stunning rally in its shares as they bet billions of dollars on the future of generative artificial intelligence.
Shares of the chipmaker fell 6% in after-hours trading, dragging down shares of chipmakers including Advanced Micro Devices (NASDAQ:) and Broadcom (NASDAQ:), as well as other tech giants. The report was seen as a day of reckoning for the technology sector and the results were viewed as mixed, despite strong growth and earnings.
“That’s the problem. The pulse this time around was much smaller than we’ve seen,” said Ryan Detrick, chief market strategist at Carson Group. “Even forward guidance was raised, but again not to the same tone as previous quarters. This is a great company that’s still growing revenue by 122%, but it seems like the bar was set too high for this earnings season.”
Revenue and gross margin forecasts for the current quarter fell short of analysts’ expectations, failing to live up to a recent history of beating Wall Street targets, overshadowing second-quarter revenue and adjusted earnings as well as the unveiling of a $50 billion share buyback.
For the last three consecutive quarters, Nvidia has posted revenue growth of more than 200%, and the company’s ability to beat estimates is increasingly at risk as each success prompts Wall Street to raise its targets even higher.
The company’s CEO, Jensen Huang, highlighted the growing demand for the company’s powerful graphics processors, which have become the backbone of generative AI technology like OpenAI’s ChatGPT. “You have more and more and more,” he told analysts on a conference call, describing the demand.
Huang confirmed media reports that Nvidia’s next-generation Blackwell chips would be delayed until the fourth quarter, but downplayed the impact, saying customers were buying current-generation Hopper chips.
The company said it is shipping samples of Blackwell’s chips to its partners and customers after modifying their design, and that it expects to generate billions of dollars in revenue from these chips in the fourth quarter.
Investor concern
Much is riding on that forecast from Nvidia, whose shares have surged more than 150% this year, adding $1.82 trillion to its market value and sending it to new record highs. If its shares continue to lose ground after trading hours on Wednesday, Nvidia is expected to lose $175 billion in market value.
The forecast could raise fresh concerns about slow returns on AI investments, which some investors fear could prompt tech giants to reconsider the billions of dollars they spend on data centers. Those concerns have sent ripples through the AI rally in recent weeks.
Nvidia’s biggest customers — Microsoft (NASDAQ:), Alphabet (NASDAQ:), Amazon (NASDAQ:) and Meta Platforms (NASDAQ:) — are expected to incur more than $200 billion in capital expenditures in 2024, much of it going toward building out AI infrastructure.
Shares of these companies fell less than 1% in after-hours trading on Wednesday.
“This reflects growing investor concern about the long-term viability of the generative AI market, as the entire market appears to be riding on Nvidia’s performance,” said Jacob Born, an analyst at eMarketer.
Nvidia is also facing regulatory scrutiny over its practices.
The company said in its quarterly report that it received requests for information from regulators in the United States and South Korea, regarding “GPU sales, our supply allocation efforts, our base models and investments, and our partnerships and other agreements with companies developing base models.” Previously, the company had only referred to inquiries from the European Union, the United Kingdom and China.
Last month, Reuters reported that France’s antitrust authority was planning to file charges against Nvidia for alleged antitrust practices. Earlier, a media report said that U.S. regulators were investigating whether Nvidia was trying to integrate its networking equipment with the company’s much-anticipated artificial intelligence chips.
Nvidia expects adjusted gross margin of 75%, plus or minus 50 basis points, in the third quarter. Analysts on average expected gross margin of 75.5%, according to LSEG data. The company reported gross margin of 75.7% in the second quarter versus a median estimate of 75.8%.
The company’s gross profit margin remains higher than that of its competitors, thanks to the higher prices associated with its fast chips. AMD reported an adjusted margin of 53% in the fiscal second quarter.
Nvidia forecast revenue of $32.5 billion, plus or minus 2%, for the third quarter, compared with analysts’ average estimate of $31.77 billion, according to LSEG data.
Second-quarter revenue was $30.04 billion, beating estimates of $28.70 billion. Excluding items, Nvidia earned 68 cents per share in the second quarter, beating estimates of 64 cents.
Nvidia’s data center sales jumped 154% to $26.3 billion in the second quarter ended July 28, beating estimates of $25.15 billion. Compared to the first quarter, they were up 16%.
It also generates its revenue from selling chips to gaming and automotive companies.