NVIDIA faces headwinds in AI, Q3 performance continues to crush expectations, but warns of Q4 sales in China, stock drops more than 6% after hours.

The AI ​​application boom continues to drive Nvidia's quarterly performance, which has exceeded market expectations. However, facing the new US export restrictions that will take effect in the fourth quarter, this AI chip giant is facing headwinds and sounding the alarm for a significant decline in sales in China.

Some analysts pointed out that sales in China will not be a concern in the near future, but it may be an area of ​​concern for investors in the future. In addition to the impact of export restrictions, some comments stated that although Nvidia's fourth-quarter revenue guidance is higher than the market's average expectations, it is lower than the expectations of some Wall Street analysts who expect a maximum of $21 billion. This is equivalent to Nvidia's guidance being 4.8% lower than the high-end expectations.

After the financial report was released, Nvidia's stock price fell 0.9% after hours, with a huge shock. The stock price initially rose more than 1% after hours, then quickly plunged, with a post-market decline of more than 6% at one point, and then slightly rebounded, but is currently back on a downward trend after hours.

Third-quarter revenue exceeds expectations, with a year-on-year increase of twice and EPS profit nearly six times. Pay attention to the impact of Israel's related geopolitical situation on operations.

After the US stock market closed on Tuesday, November 21, Nvidia announced that for the third quarter of the fiscal year 2024, which ended on October 29, 2023, both revenue and earnings per share (EPS) grew more rapidly than Wall Street expected:

• In the third quarter, revenue was $18.12 billion, a year-on-year increase of 206%, analysts expected an increase of 171% to $16.09 billion, which is nearly 13% higher than expected, and also far exceeds Nvidia's own guidance range of $15.68 billion to $16.32 billion. In the previous quarter, second-quarter revenue increased by 101% year-on-year.
• In the third quarter, non-GAAP adjusted EPS was $4.02, a year-on-year increase of 593%. Analysts expected an increase of 479% to $3.36, which is nearly 20% higher than expected. The year-on-year increase in the second quarter was 429%.
• In the third quarter, the non-GAAP adjusted gross margin was 75.0%, an increase of 18.9 percentage points year-on-year, higher than the analyst's expected 72.5%, and higher than Nvidia's guidance range of 72% to 73%. It increased by 3.8 percentage points compared to the second quarter.

With this, Nvidia has achieved year-on-year revenue growth for two consecutive quarters and continued its excellent performance above expectations for many quarters in the past five years. Before the release of the third-quarter report, FactSet data showed that in the previous 20 quarters, Nvidia's performance exceeded market expectations in 19 quarters.

In the third quarter, Nvidia's non-GAAP operating expenses increased by 13% year-on-year and 10% quarter-on-quarter, mainly reflecting increased employee and compensation costs.

At the same time, Nvidia pointed out that it is closely monitoring the impact of Israel and the surrounding geopolitical conflicts on the company's operations, including the costs associated with supporting the affected employees and charitable activities, which are included in the third-quarter operating expenses. AI chip business data center revenue nearly doubled YoY, reaching a new quarterly high. Among its main businesses, only automotive revenue fell below expectations.

In terms of business segments, the demand for AI continues to drive NVIDIA's revenue growth. The core business of NVIDIA's data center, including AI graphics cards, maintained strong momentum with doubled revenue, repeatedly breaking quarterly revenue records this year. The revenue growth of the gaming business also exceeded expectations.

In the third quarter, data center revenue reached $14.514 billion, a YoY increase of 279% and a QoQ increase of 38%. Analysts had expected $12.82 billion, a YoY increase of 171% from the second quarter. NVIDIA attributed the strong growth in the third quarter to the strong demand for the NVIDIA HGX platform based on the Hopper and Ampere architecture GPUs, mainly from cloud service providers and large consumer internet companies.

In other businesses, the gaming business saw a significant increase in growth compared to the previous quarter. Gaming revenue in the third quarter increased by 81% YoY to $2.856 billion, with a QoQ increase of 15%. Analysts had expected $2.7 billion, a YoY increase of 22% from the second quarter.

NVIDIA attributed the significant YoY growth in the gaming business to increased sales to partners after channel inventory levels normalized. The QoQ increase reflected strong demand for the GeForce RTX 40 series GPUs during the back-to-school season and the early holiday season.

In the third quarter, revenue from the professional visualization business reached $416 million, a YoY increase of 108% and a QoQ increase of 10%. Analysts had expected $409.2 million, a YoY decrease of 24% from the second quarter.

NVIDIA believes that the YoY increase in this business segment reflects increased sales to partners after channel inventory levels normalized. The QoQ increase continued to be driven by strong demand for enterprise workstations, as well as increased production of notebook workstations based on the Ada Lovelace GPU architecture.

Automotive revenue in the third quarter reached $261 million, a YoY increase of 4% and a QoQ increase of 3%. This was lower than analysts' expectations of $266.9 million. In the second quarter, automotive revenue had increased by 15% YoY but decreased by 15% QoQ. NVIDIA stated that the YoY increase mainly reflected the growth in sales of automotive cockpit solutions and autonomous driving platforms, while the QoQ increase was driven by sales of autonomous driving platforms.

For the fourth quarter, NVIDIA's revenue guidance exceeded expectations, with an expected increase of 230%. However, the CFO mentioned that sales in China are expected to "significantly decline" in the fourth quarter.

In terms of performance guidance, NVIDIA expects its revenue for the fourth quarter of fiscal year 2024 to be $20 billion, with a fluctuation range of 2%. This is equivalent to a guidance range between $19.6 billion and $20.4 billion.

Based on $20 billion, NVIDIA expects its third-quarter revenue to increase by nearly 231% YoY, marking three consecutive quarters of doubled growth and exceeding the analyst consensus by 11.7%. Analysts estimate that the average revenue for the fourth quarter will be $17.9 billion, a YoY increase of approximately 196%. NVIDIA also expects its adjusted gross margin for the fourth quarter, on a non-GAAP basis, to be 75.5%, with a fluctuation of 50 basis points, between 75% and 76%, an increase of 9.4 percentage points compared to the same period last year. The operating expenses for the third quarter are expected to be $2.2 billion, a nearly 24% increase year-on-year.

However, NVIDIA's CFO, Colette Kress, warned during the earnings report release that sales in the fourth quarter are expected to decline significantly in China and other regions affected by the new export restrictions imposed by the US government in October.

Kress stated that NVIDIA believes the sales decline in China and other affected regions will be offset by strong growth in other regions during the fourth quarter. However, she pointed out that these regions affected by export license requirements have consistently contributed 20% to 25% of the data center business revenue in recent quarters.

Kress also mentioned that NVIDIA is working with customers in China and other affected regions to obtain export licenses for delivering certain products and to jointly research "solutions" that do not trigger export restrictions.

In the third quarter earnings report, NVIDIA CEO Jensen Huang stated that the company's strong growth reflects the broad industry platform transformation from general computing to accelerated computing and generative AI. He said:

"Startups in large language models (LLM), consumer internet companies, and global cloud service providers are the pioneers, and the next wave is beginning to take shape. Cloud solution providers (CSPs) in countries and regions are investing in AI clouds to meet local demands, enterprise software companies are adding AI assistants and assistants to their platforms, and businesses are creating custom AI to automate the largest industries globally.

NVIDIA's GPUs, CPUs, networking, AI contract manufacturing services, and NVIDIA AI Enterprise software are all engines of rapid growth. The era of generative AI is taking off."