NVIDIA Shares Fall on Market Disappointment

In the past year, NVIDIA has experienced an explosive surge in revenue driven by the skyrocketing demand for chips. This tech giant, which has reached a valuation of over a trillion dollars, seems to have hit a plateau after a remarkable growth phase. Recent financial reports reveal that NVIDIA's impressive streak of six consecutive quarters of triple-digit growth has come to a halt, and analysts are concerned that this trend may persist. Despite projecting a 70% year-over-year growth for the upcoming fourth quarter, this estimated increase falls short when compared to last year's staggering 265% annual growth rate. Investors, who have grown accustomed to the high growth days under CEO Jensen Huang, are now sensing potential risks, leading to a more cautious attitude towards the company’s future performance.

A slowdown in performance growth has become apparent. After the market closed on November 20, NVIDIA disclosed its third-quarter earnings for fiscal year 2025, which ended on October 27, 2024. The company recorded an all-time high sales revenue of $35.1 billion, reflecting a 17% quarter-on-quarter increase and an impressive 94% year-over-year rise. However, this represents the first quarter in which NVIDIA's year-over-year growth rate has not doubled since Q1 of fiscal year 2024, indicating a more subdued growth trajectory.

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The company’s earnings guidance for the next quarter suggests further revenue deceleration. Using a midpoint revenue estimate of $37.5 billion, NVIDIA anticipates a roughly 70% year-over-year increase in revenue. This figure, although better than the consensus estimate of $37.1 billion among analysts, still falls short of the buy-side expectations of $38.8 billion, with some analysts even projecting it to reach as high as $41 billion.

NVIDIA's data center segment continues to be the largest contributor to its revenue, encompassing a variety of hardware and software products, including GPU chips and AI servers. During the third quarter, revenue from this segment was recorded at $30.8 billion, marking a significant 112% increase compared to last year, but this rate of growth has inevitably slowed from the previous quarter's astonishing 154%. A handful of major clients, including tech giants like Microsoft and Amazon, dominate the sales figures, accounting for nearly half of the data center sales, a notable rise from 45% in the second quarter, as pointed out by Colette Kress, NVIDIA's executive vice president, and CFO.

Following the earnings announcement, NVIDIA shares fell almost 0.8%, with post-market trading reflecting a drop of about 5% before recovering to reduce losses. Jensen Huang, along with several executives, participated in a conference call post-report to reassure investors regarding the company’s strategic direction.

According to Huang, two major trends are propelling the global adoption of NVIDIA’s chips: a transition from CPU-supported programming to GPU-supported machine learning across the compute landscape, and the emergence of new industries driven by AI technologies. He stated that as foundational model manufacturers expand their deployment scales of AI pre-training, post-training, and cloud-based AI inference capabilities, the demand for NVIDIA's Hopper chips and expectations for its Blackwell chips are “incredible.”

Regarding the much-anticipated Blackwell architecture chips, Huang assured that all design flaws have been resolved, and mass production has commenced. He emphasized that the anticipated demand for this high-performance chip is expected to considerably exceed expectations in the coming quarters.

In June, NVIDIA announced a faster iteration cycle for its AI chip roadmap, moving to an annual update instead of two years. The new generation of AI chips, Blackwell, is set to enter production in 2024, while the Blackwell Ultra is expected to launch in 2025, followed by the next-generation AI chip architecture platform, Rubin, in 2026. Nonetheless, Blackwell chips have faced scrutiny due to reported design defects, prompting delays of at least a quarter in production and delivery timelines.

Recent reports from technology media outlet The Information highlighted that deploying Blackwell chips in high-capacity server racks accommodating up to 72 GPUs could lead to overheating issues. In response, NVIDIA has repeatedly requested suppliers to redesign these racks, causing clients to express concerns about further delays in implementation.

During the third quarter, NVIDIA delivered 13,000 GPU samples to clients, including the initial Blackwell DGX engineering units provided to OpenAI. Currently, Blackwell chips are with all major partners for the establishment of their data centers, and demand significantly outweighs supply. NVIDIA is making efforts to ramp up production capabilities, with quarterly sales expected to surpass initial estimates by several billion dollars in revenue.

However, the production challenges associated with Blackwell chips are also impacting NVIDIA’s profitability. For the third quarter, the adjusted gross margin reached 75%, remaining consistent with last year's level. Gross margins are expected to decline to 73.5% in the fourth quarter, with Kress indicating that margins are anticipated to dip to just above 70% during the initial phase of Blackwell production. As production ramps up, the gross margins are expected to recover to mid-70% levels, a target believed to be achievable by the second half of next year.

Analysts, such as Wedbush's managing director Daniel Ives, argue that “Blackwell represents the next frontier for NVIDIA and the entire AI revolution. We believe the market is still underestimating the demand curve for the next 12 to 18 months and beyond.” During the previous quarter's reporting season, spending in cloud data centers and AI projects from Microsoft, Amazon, and Google remained robust, indicating significant enterprise AI demand is underway.

As we look towards the potential for NVIDIA amid the ongoing AI wave, the company has seen its stock price surge over 200% year-to-date, solidifying its position as the world’s most valuable company. In 2023 alone, NVIDIA's shares increased by over 240%. However, analysts from Morgan Stanley caution that restrictive supply chain factors may impact NVIDIA's short-term stock performance.

Despite these challenges, industry insiders still express strong confidence in NVIDIA's future trajectory. Dave Mazza, CEO of investment management firm Roundhill Investments, stated in a recent interview that even though the recent reports of design flaws in Blackwell chips pose risks, they are not likely to significantly affect NVIDIA's long-term growth path. The company has a solid track record of tackling technical challenges and delivering industry-leading products, while the demand for NVIDIA GPUs in the AI and data center markets remains robust.

NVIDIA currently stands as a primary holding in Roundhill Investments' MAG7 ETF, representing 16.29% of the entire portfolio, second only to Tesla’s 17.83%. Mazza remarked, “Unless unforeseen structural issues arise, NVIDIA can be a cornerstone holding in any tech-focused portfolio. While specific trading decisions may hinge on earnings report details, we remain very confident in NVIDIA.”

Market observers are also focused on NVIDIA's influence on the broader tech sector and the entire U.S. stock market. Mazza noted that NVIDIA's earnings report serves as a bellwether for the tech industry, especially in AI. A strong report coupled with an optimistic outlook could reignite investor enthusiasm in tech stocks, potentially driving an industry-wide rally. Conversely, a disappointing performance or conservative guidance from NVIDIA could lead to a temporary pullback in high-growth tech stocks.

In a report released last Sunday, Bank of America analysts suggested that NVIDIA's third-quarter earnings report could guide the short-term trajectory of the U.S. stock market. Analysts, led by Gonzalo Asis, emphasized NVIDIA's significant role within the S&P 500, highlighting that it has accounted for approximately 20% of the S&P 500's returns over the past year.