(Reuters) - Shares of Nvidia (NVDA.O)
and other technology heavyweights fell late on Wednesday, a discouraging sign for investors betting that a strong forecast from the dominant seller of AI chips would fuel fresh gains in Wall Street's most valuable companies.
Nasdaq futures fell about 1% following Nvidia's quarterly earnings report, suggesting traders expect tech stocks to lose ground on Thursday.
Nvidia dropped almost 7% and lost $200 billion in stock market value after it forecast third-quarter gross margins that could miss market estimates and revenue that was largely in line. A handful of other AI-related companies shed around $100 billion in combined value.
Shares of Broadcom (AVGO.O) and Advanced Micro Devices (AMD.O) were each down about 2%. Microsoft (MSFT.O) and Amazon (AMZN.O) each dipped almost 1%.
If Wednesday's late-day dip in Nvidia shares extends into Thursday, it would be well short of the 11% price swing the options market had priced for the shares, according to data from options analytics firm ORATS.
Surging demand for its AI chips helped Nvidia crush consensus analyst estimates for several quarters, a trend that led investors to expect the company to exceed forecasts by higher and higher margins.
Nvidia's soft forecasts overshadowed a beat on second-quarter revenue and adjusted earnings as well as the unveiling of a $50 billion share buyback.
"They beat but this was just one of those situations where expectations were so high. I don't know that they could have had a good enough number for people to be happy," said JJ Kinahan, CEO of IG North America and president of online broker Tastytrade.
The lackluster response to Nvidia's earnings report could help set the tone for market sentiment heading into what is historically a volatile time of the year. The S&P 500 has fallen in September by an average of 0.8% since World War Two, the worst performance of any month, according to CFRA data.
Investors are also watching next week's U.S. employment report for signs on whether the labor market weakness that roiled stocks in early August has dissipated.
Optimism about AI technology, in part due to Nvidia's explosive growth, has fueled gains on Wall Street over the past year.
However, confidence in that rally has wavered in recent weeks following an earnings season that saw investors punish shares of tech companies whose results failed to justify rich valuations.
Investors have also become concerned about increases in already hefty spending by Microsoft, Alphabet (GOOGL.O) and other major players in the race to dominate emerging AI technology. Microsoft and Alphabet's stocks remain down since their reports last month.
Nvidia forecast revenue of $32.5 billion, plus or minus 2%, for its fiscal third quarter, compared with analysts' average estimate of $31.8 billion, according to LSEG data. That revenue forecast implies 80% growth from the year-ago quarter.
The Santa Clara, California-based company expects adjusted gross margin of 75%, plus or minus 50 basis points, in the third quarter. Analysts on average forecast gross margin to be 75.5%, according to LSEG data.
Nvidia's stock dropped 2.1% in Wednesday's session, ahead of its report. It remains up about 150% so far in 2024, making it the biggest winner in Wall Street's AI rally.
Nvidia's stock was valued at 36 times earnings ahead of its quarterly report, inexpensive compared to its average of 41 over the past five years. The S&P 500 (.SPX) is trading at 21 times expected earnings, compared to a five-year average of 18.
Nvidia's (NVDA.O) quarterly forecast on Wednesday failed to meet lofty expectations of investors who have driven a dizzying rally in its stock as they bet billions on the future of generative artificial intelligence.
Shares of the chipmaker fell 6% in after-hours trading, weighing on shares of other chipmakers. The report has been seen as a day of reckoning for the tech sector and the results were treated as mixed, despite heady growth and profit.
"Here's the issue," said Ryan Detrick, chief market strategist at the Carson Group. "The size of the beat this time was much smaller than we've been seeing." He added, "Even future guidance was raised, but again not by the tune from previous quarters. This is a great company that is still growing revenue at 122%, but it appears the bar was just set a tad too high this earnings season."
The revenue and gross margin forecast for the current quarter were not far from analysts' expectations and failed to live up to a recent history of trouncing Wall Street's targets, overshadowing a beat on second-quarter revenue and adjusted earnings as well as the unveiling of a $50 billion share buyback.
In the last three consecutive quarters, Nvidia recorded revenue growth of more than 200%, and the company's capacity to surpass estimates is at increasingly greater risk as each success prompts Wall Street to raise its targets even higher.
CEO Jensen Huang played up insatiable demand for the company's powerful graphics processors that have become the workhorses for generative AI technology such as OpenAI's ChatGPT. "You have more on more on more," he told analysts on a conference call, describing demand.
Huang confirmed media reports that a ramp-up in production of Nvidia's next-generation Blackwell chips was delayed until the fourth quarter, but downplayed the impact, saying customers were snapping up current-generation Hopper chips.
The company said it was shipping Blackwell samples to its partners and customers after tweaking its design, and that it expected several billion dollars in revenue from these chips in the fourth quarter.
Shares in chipmakers including Advanced Micro Devices (AMD.O) and Broadcom (AVGO.O) both fell nearly 4%. Asian chipmaker SK Hynix (000660.KS) fell 4.5% and Samsung (005930.KS) was down 2.8% in Thursday morning trading in Asia.
INVESTOR JITTERS
Much hinges on this outlook from Nvidia, whose stock has surged more than 150% this year, adding $1.82 trillion to its market value and lifting the S&P 500 (.SPX) to new highs. If Wednesday's after-hours stock losses hold, Nvidia is set to lose $175 billion in market value.
The forecast could stoke fresh concerns about slow payoffs from generative AI investments, which some investors fear could lead tech giants to rethink the billions of dollars they are spending on data centers. These concerns have sent ripples through the AI rally in recent weeks.
Nvidia's biggest customers - Microsoft (MSFT.O), Alphabet (GOOGL.O), Amazon (AMZN.O) and Meta Platforms (META.O) - are expected to incur more than $200 billion in capital expenditures in 2024, most of which is meant for building AI infrastructure.
Shares of these companies dipped less than 1% in after-hours trading on Wednesday.
"It's a reflection of growing investor jitters about the long-term viability of the generative AI market, with the entire market seemingly hinging on Nvidia's performance," said eMarketer analyst Jacob Bourne.
Nvidia is also facing regulatory scrutiny about its practices.
The company said in its quarterly filing it has received requests for information from regulators in the U.S. and South Korea, regarding "sales of GPUs, our efforts to allocate supply, foundation models and our investments, partnerships and other agreements with companies developing foundation models." Previously the company had noted inquiries only from the EU, UK and China.
Reuters reported last month that France's antitrust regulator was set to charge Nvidia on alleged anticompetitive practices. A media report said earlier that U.S. regulators were probing whether Nvidia was trying to bundle its networking equipment with its sought-after AI chips.
Nvidia expects adjusted gross margin of 75%, plus or minus 50 basis points, in the third quarter. Analysts on average forecast gross margin to be 75.5%, according to LSEG data. It reported a 75.7% gross margin in the second quarter versus an average estimate of 75.8%.
Its gross margin still tops that of rivals, helped by the steep price tags attached to its speedy chips. AMD recorded an adjusted margin of 53% in its fiscal second quarter.
Nvidia forecast revenue of $32.5 billion, plus or minus 2%, for the third quarter, compared with analysts' average estimate of $31.77 billion, according to LSEG data.
Second-quarter revenue was $30.04 billion, beating estimates of $28.70 billion. Excluding items, Nvidia earned 68 cents per share in the second quarter, beating estimates of 64 cents.
Sales in Nvidia's data center segment grew 154% to $26.3 billion in the second quarter ended July 28, above estimates of $25.15 billion. From the first quarter, it increased 16%.
It also derives revenue from selling chips to gaming and auto companies.
Reporting by Arsheeya Bajwa in Bengaluru; Additional reporting by Noel Randewich in Oakland, California; Writing by Sayantani Ghosh; Editing by Arun Koyyur, Peter Henderson and Matthew Lewis
Nations building artificial intelligence models in their own languages are turning to Nvidia's (NVDA.O) chips, adding to already booming demand as generative AI takes center stage for businesses and governments, a senior executive said on Wednesday.
Nvidia's third-quarter forecast for rising sales of its chips that power AI technology such as OpenAI's ChatGPT failed to meet investors' towering expectations. But the company described new customers coming from around the world, including governments that are now seeking their own AI models and the hardware to support them.
Countries adopting their own AI applications and models will contribute about low double-digit billions to Nvidia's revenue in the financial year ending in January 2025, Chief Financial Officer Colette Kress said on a call with analysts after Nvidia's earnings report.
That's up from an earlier forecast of such sales contributing high single-digit billions to total revenue. Nvidia forecast about $32.5 billion in total revenue in the third quarter ending in October.
"Countries around the world (desire) to have their own generative AI that would be able to incorporate their own language, incorporate their own culture, incorporate their own data in that country," Kress said, describing AI expertise and infrastructure as "national imperatives."
She offered the example of Japan's National Institute of Advanced Industrial Science and Technology, which is building an AI supercomputer featuring thousands of Nvidia H200 graphics processors.
Governments are also turning to AI as a measure to strengthen national security.
"AI models are trained on data and for political entities -particularly nations - their data are secret and their models need to be customized to their unique political, economic, cultural, and scientific needs," said IDC computing semiconductors analyst Shane Rau.
"Therefore, they need to have their own AI models and a custom underlying arrangement of hardware and software."
Washington tightened its controls on exports of cutting-edge chips to China in 2023 as it sought to prevent breakthroughs in AI that would aid China's military, hampering Nvidia's sales in the region.
Businesses have been working to tap into government pushes to build AI platforms in regional languages.
IBM (IBM.N) said in May that Saudi Arabia's Data and Artificial Intelligence Authority would train its "ALLaM" Arabic language model using the company's AI platform Watsonx.
Nations that want to create their own AI models can drive growth opportunities for Nvidia's GPUs, on top of the significant investments in the company's hardware from large cloud providers like Microsoft (MSFT.O), said Bob O'Donnell, chief analyst at TECHnalysis Research.