Nvidia's quarterly forecast misses investor hopes, shares tumble

Nvidia misses mark: Nvidia’s latest quarterly forecast, revealed on Wednesday, did not meet the lofty expectations set by investors who have driven its stock to dizzying heights amid substantial bets on the future of generative AI.

The company’s shares dropped 6 per cent in after-hours trading, dragging down the stocks of other chipmakers such as Advanced Micro Devices (AMD) and Broadcom (AVGO), as well as major tech players. The results have been seen as a moment of reckoning for the tech sector, with mixed reactions despite impressive growth and profitability.

Ryan Detrick, Chief Market Strategist at the Carson Group, pointed out, "The size of the beat this time was much smaller than we've been seeing." 

He added, "Even future guidance was raised, but not by the magnitude of previous quarters. This is a great company still growing revenue at 122 per cent, but it appears the bar was just set a tad too high this earnings season."

Forecasts fall short

Nvidia’s revenue and gross margin forecast for the upcoming quarter fell short of analysts' high expectations, overshadowing the company’s beat on second-quarter revenue and adjusted earnings, along with a $50 billion share buyback announcement. 

In the past three quarters, Nvidia had recorded over 200 per cent revenue growth, but the risk of surpassing estimates has grown as Wall Street's targets continue to rise.

Demand remains strong

CEO Jensen Huang highlighted the relentless demand for Nvidia's powerful graphics processors, essential for generative AI technologies like OpenAI’s ChatGPT.  

"You have more on more on more," when discussing demand. Huang also confirmed that the ramp-up of Nvidia’s next-generation Blackwell chips would be delayed until the fourth quarter but stressed that current-generation Hopper chips were in high demand.

Investor concerns and market impact

Much is riding on Nvidia’s outlook. The company’s stock has surged over 150 per cent this year, adding $1.82 trillion to its market value and contributing to new highs for the S&P 500. If the after-hours losses persist, Nvidia could see a $175 billion drop in market value. 

This forecast has sparked concerns about slow returns from generative AI investments, potentially leading tech giants to reassess their data center expenditures, which has affected the broader AI rally.

Regulatory scrutiny intensifies

Nvidia is also facing increased regulatory scrutiny. The company has received information requests from US and South Korean regulators regarding GPU sales, supply allocation, and investments in AI. Additionally, Nvidia is under investigation by France’s antitrust regulator for alleged anti-competitive practices and by US regulators for possible bundling of networking equipment with AI chips.

Nvidia expects an adjusted gross margin of 75 per cent for the third quarter, slightly below analysts' forecast of 75.5 per cent. The company reported a 75.7 per cent gross margin in the second quarter. 

Despite this, Nvidia’s margin remains superior to competitors like AMD, which reported a 53 per cent margin. Nvidia’s third-quarter revenue forecast stands at $32.5 billion, surpassing the average estimate of $31.77 billion. 

Second-quarter revenue reached $30.04 billion, exceeding estimates, and Nvidia earned 68 cents per share, beating the 64-cent estimate. Sales in Nvidia’s data center segment grew by 154 per cent to $26.3 billion, surpassing estimates and showing a 16 per cent increase from the previous quarter.

Nvidia also generates revenue from its gaming and automotive chip sales.