Nvidia rally takes a breather after forecasts leave investors baffled

Nvidia Shares fell 3% on Thursday after its forecast fell short of lofty expectations, but the modest sell-off showed investors are still confident in the generative AI boom that has boosted the chip giant’s stock all year.

Shares had fallen more than 5% before the market close after Nvidia on Wednesday forecast third-quarter gross margins that might miss market estimates and revenue that was largely in line.

Some investor concerns were allayed after the company said it expects production of its next-generation Blackwell chips to ramp up in the fourth quarter.

The rally also boosted shares of other chip companies such as Broadcom, Advanced Micro Devices and Arm, which rose between 1.1% and 5%.

Nvidia has crushed financial worldThe company’s multi-quarter estimates are based on rising demand for AI chips, leading investors to rely on the company’s tendency to routinely beat forecasts. The stock’s strength has been a mainstay of the market’s rally over this year and last, leading to what some say are ultimately unbeatable forecasts. “They beat expectations, but this was just one of those situations where expectations were very high. I don’t know if they could have had a good enough number to make people happy,” said JJ Kinahan, CEO of IG North America and president of online broker Tastytrade. The forecast followed strong second-quarter earnings that beat Wall Street expectations, and the AI ​​bellwether also announced a new $50 billion share buyback. “Investors want more, more, more when it comes to Nvidia,” said Dan Coatsworth, an 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.”

According to LSEG data, Nvidia expects fiscal third-quarter revenue of $32.5 billion, with a margin of error of 2%, versus analyst estimates of $31.8 billion. That revenue forecast implies 80% growth from the same quarter a year ago, but is below the upper end of market estimates of $37.9 billion.

PURCHASE OPPORTUNITY

Some analysts saw the drop as a buying opportunity.

“Nvidia has had much bigger declines in earnings reports…we think the sell-off is an opportunity to accumulate shares,” said Nancy Tengler, CEO of Laffer Tengler Investments.

Big Technology stocks shrugged off the weakness, a sign that investors did not view the report as a bad sign for the AI ​​boom. Alphabet, Meta Platforms, Amazon.com and Apple all rose nearly 2%.

“The long-term AI story remains intact. It’s a relief that the numbers haven’t been disastrous,” said Ben Barringer, an analyst at Quilter Cheviot.

Concerns about slow returns on big investments in artificial intelligence have dogged big tech companies in recent weeks, with shares of Microsoft and Alphabet trading lower since their quarterly reports last month.

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

However, some analysts were concerned about increased regulatory scrutiny after Nvidia revealed requests for information from US and South Korean regulators, adding to earlier inquiries from the EU, UK and China.

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

The lackluster response to Nvidia’s earnings report could help set the tone for market sentiment heading into what is historically a volatile time of year. The S&P 500 has fallen an average of 0.8% in September since World War II, the worst performance of any month, according to CFRA data.

Nvidia shares fell 2.1% in Wednesday’s session ahead of its report. At the close of the most recent financial year, the stock is still up around 150% so far in 2024, making it the biggest winner 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.