Nvidia’s AI Boom Fails to Meet Investors’ High Hopes

Investors of Nvidia Corp. responded with a lukewarm reception to the company’s recent quarterly report. Although the report exceeded the predictions of average analysts, it did not meet the higher expectations of shareholders who have heavily invested in the potential of artificial intelligence.

The turnover for the current period is about 20 billion dollars, the world’s most valuable chip manufacturer said in a statement on Tuesday. While that beat Wall Street’s average forecast of $17.9 billion, some forecasts were as high as $21 billion.

Shares fell 3% to $484.42 in New York on Wednesday, the biggest intraday drop in three weeks.

Although Nvidia posted an impressive second quarter of growth, some investors clearly expected more. They’ve been pouring money into the stock this year — up 242% — hoping the AI industry will continue to generate explosive sales profits for Nvidia. That means Nvidia’s stock was priced at a level that required an absolutely perfect result, analysts have said.

Outsized expectations aside, “Nvidia’s results continue to be amazing,” Wolfe Research analyst Chris Caso said in a note to clients. The numbers are particularly impressive given that U.S. restrictions on China are hurting sales, he said. In addition, Nvidia announced new chips designed for China on Tuesday that could help the market recover, he noted.

Nvidia shares had closed at $499.44 in New York on Tuesday before the report. The company has been the best-performing stock on the Philadelphia Stock Exchange’s semiconductor index this year, and is valued at more than $1.2 trillion.

In fact, Nvidia’s market capitalization is now more than $1 trillion larger than that of rival Intel Corp., which until recently was the world’s largest chip maker.

Nvidia CEO Jensen Huang has consolidated the ability of graphics chips to play a leading role in so-called accelerated computing. The company’s processors, which crunch more data by running calculations in parallel, have become a tool for training AI services.

In the third fiscal quarter, which ended Oct. 29, revenue more than tripled to $18.1 billion, the company said. Earnings were $4.02 per share, net of certain items. Analysts had predicted revenue of around $16 billion and earnings per share of $3.36.

Nvidia’s data center division, the top performer in its operations, posted revenue of $14.5 billion, up 279% year-over-year. The company’s personal computer unit, meanwhile, has recovered from an industry-wide slowdown. Its turnover increased by 81 percent to 2.86 billion dollars.

Nvidia’s success in selling AI chips to companies like Microsoft Corp. and Alphabet Inc.’s. Google has also made it a target. Microsoft unveiled its own internal AI processor last week, following a similar effort by Amazon.com Inc.’s AWS. This quarter, Advanced Micro Devices Inc. also debuted an Nvidia competitor called the MI300. But Nvidia is not standing still. It recently announced a successor to its acclaimed H100 chip, called the H200, and it will be available early next year.

Another threat to Nvidia’s business has been US restrictions on exports to China, the largest chip market. The Biden administration has restricted sales of some of Nvidia’s best products on national security grounds.

The US government recently updated its rules on such exports in October with the aim of making the restrictions more difficult to circumvent. Nvidia said the changes will not affect its sales so far because demand for its products elsewhere is insatiable. However, the demands force it to change its operations and that could have an impact down the road.

Nvidia reiterated on Tuesday that the rules had “no significant impact” in the last quarter. But China and other restricted regions account for about a quarter of its data center revenue. “We expect our sales to these destinations to decline significantly in the fourth quarter of 2024, although we believe strong growth in other regions will offset the decline,” the company said.

Chief Financial Officer Colette Kress said U.S. rules require licenses for some exports and advance notification for other types of chips when shipped to China and some Middle Eastern countries. The company is working with customers in these areas to try to secure approval to supply some products and to find “solutions” that do not impose restrictions.

The fourth-quarter drop in China, “while not a concern in the near term, will likely be an area of focus for investors,” Bloomberg Intelligence analysts Kunjan Sobhani and Oscar Hernandez Tejada said in a note.

Nvidia is developing new chips that won’t trigger export restrictions, Kress said. They will appear in the coming months but are unlikely to help results this season, he said. It’s too early and there are too many factors involved to predict how such products might affect future revenues, he said.

He said fourth-quarter guidance would have been higher without the new rules on Chinese shipments.

Huang, for his part, strongly dismissed questions about whether the company’s data center business was reaching peak growth. Nvidia is ramping up supply, and growing use of AI hardware — from software vendors, government agencies and enterprise customers — gives it confidence that demand will continue to grow.

Read more: What is H100, Chip Driving Generative AI?

“I definitely think the data center can grow until 2025,” he said.

Nvidia, based in Santa Clara, Calif., said it will spend more on employees after raising wages and hiring new staff. Operating expenses increased by 13% from the previous year and are 10% higher than the previous year.

The company also spends more money on caring for Israeli workers.

“We are monitoring the impact of the geopolitical conflict in and around Israel on our operations, including the health and safety of our approximately 3,400 employees in the region, who primarily support the research and development, operations, and sales and marketing of our networking products,” Nvidia said. “Our operating expenses in the third quarter of fiscal year 2024 include expenses for financial support of affected employees and charitable activities.”

Artificial intelligence has been the hottest topic for tech investors this year, and every major company has talked about its capabilities in this area. But Nvidia is one of the few companies making serious money from the trend, which has picked up steam since the public debut of OpenAI’s ChatGPT in November 2022. This tool helped show the potential of generative AI to a wider audience.