Nvidia: Nvidia’s dovish outlook dampens enthusiasm for AI chip stock after steady rally

Nvidia Stocks pared some losses in premarket trading on Thursday, shaking off an earlier slide. investors remained confident in the chip giant’s growth prospects despite a forecast that fell short of lofty expectations.

The company’s shares fell 3.4% after it forecast third-quarter gross margins that might miss market estimates and revenue that was largely in line, triggering a sell-off in chip stocks including Broadcom, Advanced Micro Devices and Arm.

Nvidia has far exceeded Wall Street forecasts for several quarters amid rising demand for artificial intelligence chips, leading investors to rely on the company’s tendency to consistently deliver spectacular forecasts. The stock’s strength has been a pillar of the market’s rally this year and last, leading to what some consider ultimately unbeatable forecasts.

“They exceeded expectations, but this was one of those situations where expectations were very high. I don’t know if they could have achieved a result good enough to make people happy,” said JJ Kinahan, chief executive of IG North America and president of online brokerage Tastytrade.

The forecast followed strong second-quarter earnings that beat Wall Street expectations, and the artificial intelligence powerhouse also announced a new $50 billion share buyback.

Shares of other chip companies also recouped some losses and were last trading down between 0.2% and 1%. Shares of Nvidia’s chipmaking partner TSMC, which is listed in the United States, were last marginally lower.

TSMC shares on the Taiwanese stock exchange also closed lower, as did Asian stocks. technology stocks Nvidia continued to suffer weakness, with South Korea’s KOSPI index falling to a two-week low. [.T] [.KS] “Investors want more, more, more when it comes to Nvidia,” said Dan Coatsworth, investment analyst at AJ Bell.

“It appears that investors may not have taken the average of analysts’ forecasts as a benchmark for Nvidia’s performance, but instead have taken the higher end of the estimate range as the hurdle to overcome.”

Analysts on average are forecasting second-quarter earnings per share of 64 cents, with the highest estimate being 71 cents. Nvidia reported earnings of 68 cents per share.

Big tech stocks also appeared to shrug off the impact of Nvidia’s results. Shares of Alphabet (Google’s parent company), Meta Platforms, Amazon.com and Apple rose between 0.4% and 1.5%.

“Nvidia is seen as a bellwether, but even though the numbers are a bit weak, I think people are glad that it’s no longer a hurdle. The long-term AI story is still intact. It’s a relief that the numbers haven’t been disastrous,” said Ben Barringer, analyst at Quilter Cheviot.

This comes at a time when investors are also concerned about already high spending by Microsoft, Alphabet and other major players in the race to dominate emerging artificial intelligence technology. Microsoft and Alphabet shares remain down since its reports last month.

Analysts said Nvidia’s delay in production of its next-generation Blackwell chips until the fourth quarter was not a major concern as the company is seeing strong demand for its current-generation Hopper chips.

Nvidia also revealed it had received requests for information from regulators in the US and South Korea, adding to earlier inquiries from the EU, UK and China, raising concerns of increased regulatory scrutiny of the company.

“After the Justice Department’s victory over Google, big tech companies have to be more mindful of regulatory intervention… historically, the threat was kind of ineffective. But now that they’ve gotten this victory over Google, investors have to pay a little bit more attention,” Barringer said.

The mediocre response to Nvidia earnings report It could help set the tone for market sentiment In September, the S&P 500 fell 0.8% on average since World War II, the worst performance of any month, according to CFRA data.

Investors are also looking to next week’s U.S. jobs report for signs of whether the labor market weakness that roiled stocks in early August has dissipated.

Optimism about artificial intelligence technology, in part due to Nvidia’s explosive growth, has driven gains on Wall Street over the past year.

But confidence in that rebound has been shaken in recent weeks following an earnings season in which investors punished shares of technology companies whose results failed to justify lofty valuations.

According to LSEG data, Nvidia expects revenue of $32.5 billion, with a margin of error of 2%, for the fiscal third quarter, compared with analyst estimates of $31.8 billion. That revenue forecast implies 80% growth from the same quarter last year.

The Santa Clara, California-based company expects an adjusted gross margin of 75%, plus or minus 50 basis points, in the third quarter. Analysts, on average, forecast a gross margin of 75.5%.

Nvidia shares fell 2.1% in Wednesday’s session ahead of its report. They are still up about 150% so far in 2024, making them the biggest winners of Wall Street’s artificial intelligence rally.

The stock was valued at 36 times earnings before its quarterly report, a cheap figure compared with its average of 41 over the past five years. The S&P 500 is trading at 21 times expected earnings, compared with a five-year average of 18.