Nvidia’s second-quarter results beat expectations with revenues up 15% on the previous three months and 122% on a year ago, the chipmaker revealed after yesterday’s market close (28 August). Despite this, investors are asking for more from the AI stock, which tumbled 7% in after-hours trading.
The tech stock has repeatedly smashed analysts’ expectations in previous quarters, and Nvidia’s results have become a much-anticipated market event.
Three months ago, the company reported annual revenue growth of 262% and, the quarter before, it came in at 265%. Investors have come to expect nothing less from the chipmaker giant, and some are starting to worry that the rate of growth is slowing.
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Dan Coatsworth, investment analyst at AJ Bell, says beating expectations for the seventh quarter in a row “wasn’t enough” for the market. “Even though Nvidia is still making more money each quarter than the previous one, the growth rate is slowing,” he said. “That has triggered alarm bells in the market that the AI gravy train might be losing power.”
It rounds off what has already been an underwhelming results season for Big Tech. Investors responded negatively to Amazon, Microsoft and Alphabet (Google’s parent company) earlier this summer when they revealed a sharp rise in capital expenditure in their latest results. All three companies have been investing heavily in their AI capabilities, and some investors are starting to question whether this spending will translate into profits.
Despite this latest blip, Nvidia has delivered sparkling returns for investors in recent years and has recently rivalled Apple and Microsoft for the title of most valuable company in the world. The stock is up 160% so far this year. Over the past five years, the share price has grown by a whopping 2,900%.
The question now is whether Nvidia can continue on its path of meteoric growth going forward. Much of this will depend on whether AI is as transformative for businesses as it purports to be.
“The AI craze has been in motion for nearly two years and there is a sense that companies are now shifting from ‘get involved at any price’ to ‘only get involved if the financial returns make sense,’” Coatsworth says.
Nvidia beating expectations is no longer enough
Last quarter, Nvidia issued guidance that it expected yesterday’s results to be in the region of $28 billion in revenues, plus or minus 2%. Despite delivering $30 billion, investors were left underwhelmed. Meanwhile, the company’s earnings per share came in at $0.67, also higher than consensus estimates. Earlier this week, AJ Bell reported that analysts had been forecasting around $0.63.
“It looks like investors might not have taken the average of analyst forecasts to be the benchmark for Nvidia’s performance; instead they’ve taken the highest end of the estimate range to be the hurdle to clear,” Coatsworth explains.
Commenting on the results, Nvidia’s chief executive Jensen Huang said that demand for the company’s Hopper chip “remains strong” and that the anticipation for the company’s new Blackwell chip is “incredible”.
This comes after concerns that the Blackwell chip could face delays of three months or more, following a report from tech publication The Information earlier this month. The report cited two sources including a Microsoft employee, and added that the delays “could affect customers such as Meta Platforms, Google and Microsoft that have collectively ordered tens of billions of dollars worth of the chips”.
Nvidia’s share price dropped on account of these rumours, adding to existing woes after a broader rout in the technology sector in July. The volatility didn’t end there either, with fears of a US recession causing a global selloff in stock markets in early August. Overall, the company’s share price fell by more than 25% between 10 July and 7 August.
Thankfully, Nvidia recovered almost all of this ground in the three weeks that followed. However, if yesterday's after-hours trading is anything to go by, further volatility could be in store for the stock today.
Should you invest in Nvidia?
Although investors are demanding more from AI stocks than ever before, research firm Morningstar says it has maintained its $105 fair value estimate as it sees “no signs of an AI slowdown”. Nonetheless, this suggests the stock could be overvalued as, at the time of writing, it is currently trading at $125.61.
Morningstar says it remains confident in the company, as it believes it is “still prospering from insatiable demand for graphics processors [...] and related products”. It added that it views Nvidia as the “clear-cut leader” in graphics processing units, without any “serious competition” at present.
Nevertheless, Morningstar has still assigned a “Very High Uncertainty Rating” to the stock. This is because its fair value estimate is dependent on continued AI adoption and data centre spending from Nvidia’s key customers.
Meanwhile, Nvidia has said it expects its revenues to hit $32.5 billion next quarter, plus or minus 2%. The company has a good track record when it comes to beating these forecasts, but there is no accounting for how the market will react. A high bar has been set, and investors are getting increasingly jittery when it comes to the outlook for AI stocks.
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