(Bloomberg) — Nvidia Inc.’s earnings report needed to be perfect for a stock that’s added nearly $2 trillion in market value over the past year. In the end, beating expectations prompted a sell-off.
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At issue is Nvidia's revenue guidance. While it beat analysts' average estimate, the beat was far smaller than investors have come to expect in the company's past five earnings reports. That, along with the company's admission that Blackwell's new chips faced production problems, caused Nvidia's shares to fall sharply after the market closed on Wednesday and again in premarket trading on Thursday.
The worry is that if Nvidia, the biggest beneficiary of AI spending and a key driver of the S&P 500's gains this year, is struggling to meet lofty expectations, it doesn't bode well for other equipment makers. Broadcom Inc., Advanced Micro Devices Inc. and Micron Technology Inc. also fell in early trading.
“It's not at all surprising to see shares falling on these results because this is the smallest forecast miss we've seen in a while,” said Ivana Derevska, founder and chief investment officer at Spear Invest.
Reaction to the report suggests the AI giant's valuation may have hit a new high for the time being, at least until more details emerge about the availability of Blackwell's chips. CEO Jensen Huang said supplies will be plentiful once manufacturing picks up, but his comments weren't enough to ease concerns.
Nvidia shares plunged earlier this month on macroeconomic concerns and worries about the sustainability of the company's huge investments in AI, but rebounded to close Wednesday at 37 times forward earnings, down from a recent high of 44 times in June, according to data compiled by Bloomberg.
Nvidia now expects third-quarter revenue of about $32.5 billion, $600 million above analysts' average estimate. Still, it was the narrowest margin of success since February 2023, when Nvidia's market capitalization was about $500 billion. Nvidia's market capitalization was about $3.1 trillion as of Wednesday's closing price.
“AI is still here, but I think people are a little over-excited and a little over-hyped in terms of what we can expect in the near future,” said Michael Matousek, head trader at U.S. Global Investors.
The story continues
The report capped a volatile earnings season and showed how expectations are rising.In the weeks leading up to Nvidia's earnings release, the chipmaker helped drag the S&P 500 down more than 8% from its July peak, but the stock recovered as concerns about AI spending eased and indicators about the health of the U.S. economy eased recession fears.
The results will also likely do little to reset the company's valuation. Last quarter, Nvidia beat expectations by a large margin, signaling further revenue growth going forward and compressing its multiple. With the stock price falling after the results and earnings expectations only rising slightly, we expect the multiple to remain roughly flat.
That may ease some of the concerns about bubbles, at least for now.
“People are saying AI hardware stocks are in a massive bubble, but they're still trading at less than 40 times forward earnings,” said Tony Kim, principal portfolio manager and head of BlackRock's global technology team, noting that this contrasts with the 100-plus times forward earnings seen in the dot-com era.
Still, there's plenty to like for Nvidia investors, and some analysts say the stock's decline will probably be short-lived. The company reported second-quarter sales and profits that beat expectations, and it approved spending an additional $50 billion to buy back shares.
“As superlatives become the norm, expectations become more challenging,” Morgan Stanley analysts led by Joseph Moore wrote. “The quarter was still very strong given the transitional nature of the current environment.”
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–With assistance from Ryan Vlastelica, Joel Leon, and Kit Rees.
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