Investors Concerned as Nvidia’s AI Chip Demand Booms but Sales Growth Slows

Slowing Growth in Nvidia’s AI Chip Sales Raises Investor Concerns

On Wednesday, Nvidia NVDA.O disclosed its slowest revenue growth prediction in nearly two years, disappointing some investors who have recently propelled the artificial intelligence chipmaker to the status of the world’s most valuable company.

Following the announcement of its financial results, shares of the company, headquartered in Santa Clara, California, initially dropped by 5%. However, they later recovered slightly, ending the after-hours trading session down by 2.5%. During the regular trading day, the shares had already fallen by 0.8%.

Prior to the earnings disclosure, expectations were sky-high, as Nvidia’s stock had climbed over 20% in the preceding two months and reached a record intra-day high on Monday. The company’s stock has almost quadrupled this year alone and has increased more than nine times in the past two years, bringing its market capitalization to $3.6 trillion.

Nvidia is currently rolling out its advanced Blackwell series of AI chips, which is expected to initially impact the company’s gross margins negatively, though improvements are anticipated over time.

Nvidia’s new processors have been well received by its clientele, and according to Chief Financial Officer Colette Kress during a conference call, sales of these processors are projected to surpass several billion dollars in the fourth quarter, exceeding initial estimates.

In response to reports of overheating problems with a high-end liquid-cooled server equipped with 72 new chips, CEO Jensen Huang assured that there were no issues and that major clients like Microsoft MSFT.O, Oracle ORCL.N, and CoreWeave were successfully deploying the systems.

Initially, the Blackwell chips will maintain gross margins in the low 70% range, but this is expected to rise to the mid-70s percentage as production increases, Kress explained.

The company has projected its revenue for the fourth quarter to be around $37.5 billion, plus or minus 2%, which is slightly above the $37.09 billion average estimate from analysts compiled by LSEG.

Although this represents an impressive growth rate, driven by the strong demand for Nvidia’s chips that power sophisticated generative AI systems, it indicates a noticeable deceleration from previous quarters where sales typically at least doubled.

The revenue growth forecast for the fourth quarter suggests a slowdown to approximately 69.5%, down from 94% in the third quarter.

“Investors have gotten used to significant outperformance from Nvidia, but this is becoming increasingly challenging,” remarked Ryan Detrick, chief market strategist at Carson Group. “The results are still robust, but such high expectations complicate matters further.”

Despite the slowdown, the demand for Nvidia’s AI chips remains robust, as these chips continue to dominate the market.

Production challenges, including supply chain issues, have complicated Nvidia’s ability to achieve substantial revenue beats, which have contributed to its popularity on Wall Street. However, growth could accelerate if gross margins exceed 75%, noted IDC analyst Brandon Hoff.

Limited advanced manufacturing capacity at its fabrication partner TSMC 2330.TW has been one of the bottlenecks in chip supply. Nvidia mentioned it had resolved a design flaw in its Blackwell chips by modifying the blueprints used by TSMC for production.

Following these updates, TSMC shares dropped about 1% in early Asian trading on Thursday.

Nvidia reported third-quarter adjusted earnings of 81 cents per share, surpassing the anticipated 75 cents per share.

In the data center segment, which makes up the majority of Nvidia’s revenue, sales soared by 112% to $30.77 billion for the quarter ending October 27. This segment had seen a growth of 154% in the preceding quarter.

Cloud companies’ ongoing investments in expanding data centers, which are equipped to handle the complex processing requirements of generative AI, continue to drive Nvidia’s sales.

The company noted that its adjusted gross margin had decreased to 75%.