Nvidia’s Earnings Report Reveals the Problem of Pricing Too High for Perfection

Nvidia The American group announced its fourth consecutive quarter of triple-digit revenue growth on Wednesday, beating expectations for both revenue and net income, while publishing forecasts that exceeded Wall Street’s expectations. The company even strengthened its share buyback program with a $50 billion buyback plan.

But the stock fell 7% in extended trading.

Such is the life of Nvidia, which has rode the AI ​​boom to a market cap of $3 trillion, a ninefold increase since the end of 2022 and a valuation higher than that of every public company other than Apple. (It surpassed Apple for a time in June.)

In addition to reporting 122% annual revenue growth to more than $30 billion on Wednesday, Nvidia said its current-year sales would rise about 80% to about $32.5 billion. Analysts had expected nearly $32 billion.

However, Bernstein analyst Stacy Rasgon told CNBC ahead of the report’s release that “buy-side rumors” were closer to $33 billion to $34 billion, meaning Nvidia would have to significantly beat analyst estimates in its forecast to see any upside.

Rasgon, who recommends buying shares of the chipmaker, said there is no indication that demand for Nvidia’s graphics processing units (GPUs), the core infrastructure for developing and running AI models, is waning.

“There’s still a lot of demand,” Rasgon said on CNBC’s “Closing Bell.” “They’re still shipping everything they can sell.”

Nvidia said it expects Blackwell to deliver “multi-billion dollars” in revenue in the fiscal third quarter, which ends in October. Blackwell is the company’s latest generation of technology, following Hopper. Some had feared Blackwell would be delayed, but Chief Financial Officer Colette Kress said on the conference call with analysts that “supply and availability have improved.”

“However, demand for Blackwell platforms far exceeds supply, and we expect this to continue into next year,” Kress said.

Aside from the fact that whispered numbers aren’t always there, some investors might be interested in Nvidia’s gross margin, which fell slightly in the quarter, from 78.4% in the prior-year period. That’s up from 43.5% two years ago and from 70.1% in the second fiscal quarter last year.

For the full year, the company said it expected its gross margin to be in the “mid-70s.” Analysts had expected a full-year margin of 76.4%, according to StreetAccount.

On the earnings call, analysts asked Nvidia executives whether they had customers and whether they were making money on their investment. Following the company’s previous report, Kress gave investors data showing that a cloud provider could make $5 over four years by selling access to $1 worth of Nvidia chips.

This time, Nvidia is taking a different approach. CEO Jensen Huang said on Wednesday’s call that Nvidia’s technology would take work away from traditional processors, like those made by Intel Or AMDHe also said generative AI would start doing more coding, companies like Meta could use Nvidia chips for recommendation systems, and nations would start buying more chips.

“People who invest in Nvidia infrastructure get immediate returns on their investment,” Huang said.

Huang also said that next-generation AI models would require “10, 20, 40 times” more computing power, echoing comments recently made by former Google CEO Eric Schmidt.

“Frontier models are seeing quite substantial growth,” Huang said.

He said Nvidia’s major customers are competing to be the first to deliver new AI advancements.

“The first person to reach the next level is able to introduce a revolutionary level of AI,” Huang said. “The second person to do so is slightly better or about the same level.”

But buying Nvidia stock at these levels is a bet that the company can continue to outperform sky-high expectations and requires a willingness to accept the kind of stock market volatility typically reserved for much smaller companies.

After hitting a record high in June, Nvidia lost nearly 30% of its value over the next seven weeks, shedding nearly $800 billion in market capitalization. It has since recovered most of those losses.

Over the past two years, the stock has moved 5% or more in a single day 50 times. MicrosoftThis only happened six times, one more than for Apple. HAS MetaIt happened 21 times. Tesla Fans, however, can understand. Shares of the electric carmaker have moved at least 5% over more than 70 trading days during that span.

One reason for Nvidia’s increased volatility is that it relies on a small group of customers, including those mentioned above, for a disproportionate share of its revenue. Alphabet and Meta have both recently acknowledged that they may be spending too much on their AI development, but said the risk of underinvestment is too great for them not to be aggressive.

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