NVIDIA's performance soars again, but concerns arise

Source: Content compiled from Bloomberg and Semiconductor Industry Observer

NVIDIA predicted on Wednesday that its fourth-quarter revenue would slightly exceed expectations, but still fell short of some investors' high hopes, which have made it the most valuable company in the world.

The company, headquartered in Santa Clara, California, saw its stock price drop about 3.6% in pre-market trading. During regular trading hours, the company's stock closed down 0.8%.

NVIDIA is set to launch its powerful Blackwell series of artificial intelligence chips, which will initially impact the company's gross margin but is expected to improve over time.

NVIDIA Chief Financial Officer Colette Kress told analysts during a conference call on Wednesday that the new series of processors has been well received by NVIDIA's customers, and the company's processor sales for the fourth quarter will exceed the initially expected billions of dollars.

CEO Jensen Huang stated, "The number of Blackwell units we deliver this quarter will exceed previous expectations."

Kress noted that the gross margin for the new chip production line will initially be below 70%, but will rise to around 70% as production increases.

According to data compiled by the London Stock Exchange, the company expects fourth-quarter revenue to be $37.5 billion, with a fluctuation of 2%, while the average analyst expectation is $37.09 billion, with the highest forecast reaching $41 billion.

Due to the enormous market demand for NVIDIA chips, which are at the core of complex generative artificial intelligence systems, its growth rate remains impressive, although it has noticeably slowed compared to previous quarters. In prior quarters, NVIDIA's sales had mostly doubled at least.

Huang stated, "The era of artificial intelligence is in full swing, driving the global shift towards NVIDIA computing." He referred to two high-performance artificial intelligence chips, stating, "As foundational model manufacturers expand pre-training, post-training, and inference scales, the demand for Hopper and the anticipation for fully ramped-up Blackwell are incredible."

This outlook suggests that enthusiasm for artificial intelligence may be outpacing reality. NVIDIA investors have pushed the stock price up nearly 200% in 2024, making it the most valuable company in the world. However, the chip manufacturer has struggled to meet demand for its products this year and faces production hurdles.

CEO Jensen Huang stated that NVIDIA's new product line Blackwell is now "fully ramped up." Demand for this highly anticipated product is expected to exceed supply in the coming quarters. Huang added that there is still demand for the previous design, Hopper.

"Artificial intelligence is transforming every industry, company, and country," he stated in a statement. "With breakthroughs in physical artificial intelligence and a surge in industrial robot investments, countries have realized the importance of developing national artificial intelligence and infrastructureHowever, some investors are looking forward to a more explosive quarter. After the announcement, Nvidia's stock price fell about 2% in after-hours trading. Previously, the company's closing price in New York was $145.89.

Nvidia's fourth-quarter forecast indicates that the company's revenue growth will slow from 94% in the third quarter to about 69.5%.

Before the earnings announcement, market expectations for Nvidia were high, with the stock price rising over 20% in the past two months, reaching an intraday all-time high on Monday. Year-to-date, the stock has nearly tripled, and it has increased more than ninefold over the past two years.

Ryan Detrick, Chief Market Strategist at Carson Group, stated, "Investors have become accustomed to the company's huge performance, but it is becoming increasingly difficult to achieve this. It is still a very reliable report, but the fact is that when the bar is set so high, things become more challenging."

Despite soaring demand for Nvidia chips, supply chain issues have made it difficult for Nvidia to achieve significant revenue growth, which is a key factor in making it a Wall Street darling.

One of the bottlenecks in its chip supply is the limited advanced manufacturing capabilities of its manufacturing partner, TSMC.

The company's adjusted earnings per share for the third quarter were $0.81, while the expectation was $0.75 per share.

Sales in the data center segment accounted for the majority of Nvidia's revenue, growing 112% to $30.77 billion in the quarter ending October 27. The growth rate for this segment in the previous quarter was 154%.

As cloud computing companies continue to expand data centers capable of meeting the complex processing needs of generative artificial intelligence, Nvidia's sales have benefited.

The company stated that it has fixed the design flaw of the Blackwell chip by changing the blueprint used by TSMC for its manufacturing.

Bob O'Donnell, an analyst at TECHnalysis Research, remarked, "Rumors of potential supply chain issues have clearly raised some concerns."

The company reported that its adjusted gross margin has shrunk to 75%.

Despite the disappointing outlook, Nvidia's growth over the past two years has been astonishing. Its revenue is expected to double for the second consecutive year, and its current profits exceed past total revenues. Year-to-date, the company's stock price has risen over 200%. The race for the development and application of artificial intelligence has driven Nvidia's rapid growth. Nvidia's market capitalization has reached $3.6 trillion, making it the highest-valued publicly traded company globally, significantly impacting the stock market. Earlier this year, it accounted for about a quarter of the S&P 500 index's gains.

For the third fiscal quarter ending October 27, Nvidia's revenue grew 94% to $35.1 billion. Excluding certain items, the profit was $0.81 per share. Analysts had predicted sales of about $33.25 billion and earnings of $0.74 per shareNvidia's largest division, the data center division, saw its revenue double from the previous year to $30.8 billion, exceeding Wall Street's expectations.

However, the division's network revenue has been declining consecutively, and the business is more reliant than ever on a small group of customers: cloud service providers. This group includes companies like Microsoft and Amazon's AWS, which account for 50% of data center revenue, up from 45% in the previous period.

Investors hope this number will decrease, indicating that the use of artificial intelligence is spreading across the economy.

The company's biggest money-making machine is its accelerator chips, which help develop AI models by injecting data into them. Since the debut of OpenAI's ChatGPT chatbot in 2022, the frenzy for AI services has created endless demand for this product.

Other recent earnings reports have also sent strong signals for AI. Nvidia customers, including Microsoft, Amazon, and Meta Platforms Inc., have reaffirmed their commitment to investing heavily in AI infrastructure.

Nvidia aims to stay ahead of competitors by accelerating the pace of innovation. This includes a commitment to update its product line annually. With Blackwell, it has a new set of chips that are faster and have better connectivity with other semiconductors.

However, manufacturing challenges have slowed the rollout of Blackwell. Currently, the company states that Nvidia is unable to meet all orders. Jensen Huang indicated that supply will be ample once production increases.

Nvidia warned again on Wednesday about supply constraints for Blackwell.

"The key issues surrounding the ramp-up of Blackwell's production and customer concentration remain major concerns," Emarketer analyst Jacob Bourne stated in a report. "There is almost no room for execution missteps in 2025."

In the past five years, Nvidia's quarterly revenue has only once fallen short of analysts' expectations. Moreover, recently, it has exceeded expectations by as much as 20%, setting a high standard for its performance.

The revenue from its data center division alone surpasses the total revenue of its two closest competitors, Intel and Advanced Micro Devices. This year's net income is expected to exceed Intel's revenue, which has been the largest company in the chip industry for decades.

Nvidia is known for selling graphics processing units but later discovered that the technology could also be used for AI. Its chips assist software models during training, helping them learn to recognize and respond to real-world inputs. Nvidia's components are also used in systems that run the software (known as the inference stage) and support services like ChatGPT.

The company, headquartered in Santa Clara, California, has rapidly expanded its product line to include networking, software, services, and fully built computer systems. Jensen Huang is lobbying for broader adoption of his technology worldwide and is trying to promote its use in enterprises and government agencies