Shares fell more than 5% before the bell after Nvidia forecast third-quarter gross margins on Wednesday that may have missed market estimates and revenue that was largely in line.
Some investor concerns were allayed after the company expected to ramp up production of its next-generation Blackwell chips in the fourth quarter.
The stock’s recovery also lifted shares of other chip companies such as Broadcom, Advanced Micro Devices and Arm, which were up between 1.1% and 5%.
Nvidia has crushed Wall Street estimates for several quarters on growing demand for AI chips, leading investors to bank on the company’s tendency to regularly hit forecasts. Stock strength has been a pillar of the market’s rally both this year and the past year — predicting what some say are ultimately insurmountable.
“They beat it but it was one of those situations where the expectations were too high. I don’t know if they could have had enough numbers to make people happy,” said JJ Kinahan, CEO of IG North America and president of online broker Tastytrade.
The forecast follows strong second-quarter earnings that topped Wall Street expectations and the AI bellwether also announced a new $50 billion share buyback.
“Investors want more when it comes to Nvidia,” said Dan Coatsworth, an investment analyst at AJ Bell.
“It appears that investors may not have taken the average of analysts’ forecasts as a measure of Nvidia’s performance, rather they have taken the high end of the estimate range as a hurdle to overcome.”
Nvidia forecast revenue of $32.5 billion, plus or minus 2%, for its fiscal third quarter, compared with analysts’ estimates of $31.8 billion, according to LSEG data. That revenue estimate indicated 80% growth from the year-ago quarter, but was below the top-end of market estimates of $37.90 billion.
A purchase opportunity
Some analysts saw this decline as a buying opportunity.
“Nvidia got a pretty big drawdown on (earnings) reports… We think the selloff is an opportunity to pick up the stock,” said Nancy Tengler, CEO of Leffer Tengler Investments.
Big tech stocks pared the weakness, a sign that investors didn’t see the report as a bad sign for the AI boom. Alphabet, Meta Platform, Amazon.com and Apple were up about 2%.
“The long-term AI story is still intact. It’s a bit of a relief that the numbers weren’t catastrophic,” said Ben Barringer, an analyst at Quilter Cheviot.
Concerns about slow payoffs from hefty AI investments have dogged major technology companies in recent weeks, with shares of Microsoft and Alphabet lower after their quarterly reports last month.
Delays in production of Nvidia’s next-generation Blackwell chips until the fourth quarter were not a major concern, analysts said, as the company saw strong demand for its current-generation Hopper chips.
However, some analysts were concerned about increased regulatory scrutiny after Nvidia disclosed requests for information from US and South Korean regulators, having previously increased inquiries from the EU, UK and China.
“After the DOJ’s win over Google, large-cap tech needs to be more savvy about regulatory intervention…Historically, the threat has been a bit toothless. But now that they’ve won this win over Google, investors have to pay up. A little more attention ,” Barringer said.
A disappointing response to Nvidia’s earnings report could help set the tone for market sentiment in what is a historically volatile time of year. The S&P 500 fell an average of 0.8% in September, its worst performance of any month since World War II, according to CFRA data.
Nvidia stock fell 2.1% in Wednesday’s session, ahead of its report. As of last close, it is up nearly 150% year to date in 2024, making it the biggest winner in Wall Street’s AI rally.
Prior to its quarterly report, the stock was valued at 36 times earnings, cheap compared to its average of 41 over the past five years. The S&P 500 is trading at 21 times expected earnings, compared with a five-year average of 18.
(You can now subscribe to our ETMarkets WhatsApp channel)
