Nvidia Shares Dip 4% After Underwhelming Forecast, But AI Boom Confidence Remains High

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On Thursday, Nvidia Corporation (NVDA) experienced a 4% drop in its stock value following a forecast that fell short of high expectations. Despite the modest selloff, investor confidence in the ongoing generative AI boom, which has significantly boosted the chipmaker’s stock throughout the year, remains strong.

The company had announced on Wednesday that its third-quarter gross margins might miss market forecasts, though its revenue projection was largely aligned with expectations. Nevertheless, Nvidia reassured investors by indicating that production of its next-generation Blackwell chips is expected to pick up in the fourth quarter. This news helped stabilize its stock and also positively impacted other chip manufacturers, such as Broadcom (AVGO), Advanced Micro Devices (AMD), and Arm, which saw their shares rise between 1% and 5.8% during mid-day trading.

Nvidia has a history of exceeding Wall Street’s estimates due to soaring demand for its AI chips, leading investors to anticipate consistently impressive forecasts. This stock strength has been a major contributor to the broader market rally over the past year. However, some analysts believe that the high expectations set for Nvidia made it challenging for the company to deliver numbers that would fully satisfy investors. “They beat, but the expectations were so high that it’s doubtful any number would have met all investor hopes,” said JJ Kinahan, CEO of IG North America and president of online broker Tastytrade.

The forecast followed strong second-quarter earnings that surpassed Wall Street’s predictions, along with Nvidia’s announcement of a new $50 billion share buyback program. “Investors seem to want more from Nvidia, viewing the highest end of analyst forecasts as the benchmark,” noted Dan Coatsworth, an investment analyst at AJ Bell.

For its fiscal third quarter, Nvidia projected revenue of $32.5 billion, plus or minus 2%, which is slightly above analysts’ estimates of $31.8 billion, according to LSEG data. This forecast suggests an 80% growth compared to the same quarter last year but falls short of the top-end market estimate of $37.90 billion.

Some analysts viewed the drop in Nvidia’s stock price as a buying opportunity. “Nvidia has seen more significant declines after earnings reports in the past. We see the current selloff as a chance to accumulate the stock,” stated Nancy Tengler, CEO of Laffer Tengler Investments.

Despite the dip, major tech stocks showed resilience, with companies like Alphabet (GOOGL), Meta Platforms (META), Amazon.com (AMZN), and Apple (AAPL) each gaining between 1% and 2.6%. This stability suggests that investors still see a promising long-term outlook for the AI sector. “The fundamental AI story remains intact. The less severe nature of the numbers might offer some relief,” said Ben Barringer, an analyst at Quilter Cheviot.

Recent weeks have seen concerns about slow returns on hefty AI investments affecting large tech companies, with Microsoft and Alphabet also experiencing lower stock prices since their quarterly reports. However, analysts are not overly worried about the delay in Blackwell chip production, as Nvidia is witnessing strong demand for its current-generation Hopper chips.

There are, however, some concerns regarding increased regulatory scrutiny. Nvidia disclosed that it has received information requests from U.S. and South Korean regulators, in addition to ongoing inquiries from the EU, UK, and China. “Following the DOJ’s victory over Google, large-cap tech companies must be more vigilant about regulatory interventions,” warned Barringer.

The lukewarm response to Nvidia’s earnings report may influence market sentiment as the year progresses into September, traditionally a volatile month. Nvidia’s stock, which dropped 2.1% on Wednesday before the earnings announcement, has still gained about 150% so far in 2024, making it a standout performer in Wall Street’s AI rally. Before its quarterly report, Nvidia’s stock was valued at 36 times earnings, relatively inexpensive compared to its five-year average of 41. In contrast, the S&P 500 is trading at 21 times expected earnings, compared to a five-year average of 18.