Nvidia’s stock has soared nearly fourfold this year and more than ninefold over the past two years, pushing its market value to $3.6 trillion. However, despite the booming demand for its AI chips, the company is facing concerns from investors about its slowing sales growth.
On Wednesday, Nvidia projected its slowest revenue growth in seven quarters, falling short of the high expectations of investors who have made it one of the world’s most valuable companies. Shares of the Santa Clara-based company fell by 5% following the announcement, though they recovered slightly to close down 2.5% in after-hours trading. The stock finished the regular trading day down by 0.8%.
In the weeks leading up to the earnings report, Nvidia’s stock had climbed more than 20%, hitting an intraday record high earlier in the week. The company’s stock has nearly quadrupled in value this year and more than increased ninefold over the past two years, securing Nvidia’s position as one of the top global companies by market capitalization.
Blackwell AI Chips: Strong Demand But Initial Margin Pressures
Nvidia is rolling out its new Blackwell family of AI chips, which are expected to initially lower gross margins but improve over time as production ramps up. The new chips have been well received by Nvidia’s customers, and the company is on track to exceed its initial sales forecasts for the fourth quarter, according to CFO Colette Kress.
When asked about media reports concerning overheating issues with a flagship liquid-cooled server containing 72 of the new chips, CEO Jensen Huang denied any problems, assuring investors that customers such as Microsoft, Oracle, and CoreWeave are already adopting the systems. “There are no issues with our Grace Blackwell liquid-cooled systems,” Huang told Reuters. “The engineering is difficult, but we’re in good shape.”
Initially, Blackwell chips will have gross margins in the low 70% range, but Nvidia expects this to increase to the mid-70% range as production grows. The company has forecast fourth-quarter revenue of $37.5 billion, plus or minus 2%, which slightly exceeds analysts’ average estimate of $37.09 billion.
Slowing Growth, But Demand Remains Robust
Although Nvidia is still projecting impressive growth due to the high demand for its AI chips, the pace of growth has slowed. Nvidia’s revenue growth forecast for the fourth quarter is about 69.5%, down from 94% in the third quarter.
“Investors have become accustomed to big earnings surprises from Nvidia, but maintaining that pace is getting harder,” said Ryan Detrick, chief market strategist at Carson Group. “This report is still solid, but with expectations this high, it’s becoming more difficult to exceed them.”
The deceleration in revenue growth doesn’t fully reflect the strong demand for Nvidia’s AI chips, which dominate the market. However, supply chain challenges have made it harder for Nvidia to report the big revenue “beats” it has been known for. Still, analysts like Brandon Hoff from IDC believe growth could accelerate again if Nvidia’s margins surpass 75%.
Production Challenges and Supply Chain Issues
A key factor limiting Nvidia’s ability to meet demand has been capacity constraints at TSMC, its main chip manufacturing partner. While Huang did not directly address specific production challenges with TSMC, he reassured investors that as Blackwell production ramps up, Nvidia will continue to expand production lines, improve yields, and shorten cycle times.
The yield refers to the number of functional chips produced from each wafer. Nvidia has also addressed a design flaw in the Blackwell chips by revising the blueprints used by TSMC during manufacturing.
TSMC shares dipped by about 1% in early Asian trading on Thursday.
Data Center Growth Continues Despite Slowing Sales
In the third quarter, Nvidia posted adjusted earnings of 81 cents per share, surpassing analysts’ expectations of 75 cents. Sales in Nvidia’s data center division, which accounts for the bulk of its revenue, rose 112% to $30.77 billion for the quarter ending October 27. While still impressive, this represents a slowdown from the prior quarter, which saw 154% growth.
Nvidia’s revenue continues to be buoyed by strong spending from cloud companies as they expand their data centers to handle the growing demands of generative AI systems. However, Nvidia reported that its adjusted gross margin shrank to 75%.
