Nvidia says new chips are still on track, helping reassure investors

(Bloomberg) — Nvidia Corp assured investors that its new product lineup will continue to fuel artificial intelligence-driven growth, while also signaling that the rush to roll out chips has been more costly than expected.

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Nvidia’s highly anticipated Blackwell products will ship this quarter amid “very strong” demand, CEO Jen-Hsun Huang said after the release of quarterly results. But the production and engineering costs of chips will impact profit margins, and Nvidia’s sales forecast for the current period is at odds with some of Wall Street’s more optimistic forecasts.

That prompted a tepid response from investors, who have pushed Nvidia’s stock price up nearly 200% ahead of this year’s earnings release. After a dizzying rally that turned the chipmaker into the world’s most valuable company, anything short of a blowout quarter was bound to disappoint.

The stock fell 3.6% on Thursday before rebounding in the afternoon. It closed 0.5% higher at $146.67.

Nvidia expects fiscal fourth-quarter sales of approximately $37.5 billion. The average analyst estimate was $37.1 billion, but the actual forecast was as high as $41 billion.

“Guidance appears to indicate slower growth, but that may be a conservative performance by Nvidia,” said Forrester Research Inc. analyst Alvin Nguyen. “In the short term, AI demand is nothing to worry about.” Nvidia is doing everything they should be doing. ”

The company’s biggest moneymaker is its accelerator chips, which help develop artificial intelligence models by bombarding them with data. Since the debut of OpenAI’s ChatGPT chatbot in 2022, the craze for artificial intelligence services has brought insatiable demand for the product.

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Wall Street has been closely watching the launch of Blackwell, the latest in the category with faster speeds and improved connectivity to other semiconductors. Manufacturing challenges have slowed the rollout, and Nvidia again warned of tight supply on Wednesday. Demand for the product is expected to exceed supply within several quarters.

“Key issues surrounding Blackwell’s volume growth and customer concentration remain key issues,” Emarketer analyst Jacob Bourne said in a note. “There is little room for execution missteps in 2025.”

Huang said Blackwell is now in “full production” and there is still interest in the previous design, the Hopper. “Blackwell is now in the hands of all of our key partners,” he said on a conference call.

But the switch to Blackwell has taken a toll on profitability. The company’s gross margin, which measures the percentage of sales remaining after production costs, will fall to 73% this quarter from 75% in the previous quarter. This number is expected to rebound when new products reach large-scale production and the economic benefits become more favorable.

When asked whether Nvidia’s gross margins could return to the mid-70s by the middle of next year, Chief Financial Officer Colette Kress said that was a reasonable assumption. Nvidia remains well above its peers in this category: its closest competitor, Advanced Micro Devices Inc., has a gross margin 20 percentage points lower. Intel’s share is less than half of Nvidia’s total.

Nvidia’s growth over the past two years has been astounding. Its sales are on track to double for the second year in a row and its profits are now greater than its previous total revenue.

In the third fiscal quarter ended October 27, Nvidia’s revenue increased 94% to $35.1 billion. Excluding certain items, profit per share was 81 cents. Analysts had forecast sales of about $33.25 billion and earnings per share of 74 cents.

Revenue from Nvidia’s data center division, its largest division, doubled from a year earlier to $30.8 billion. That beat Wall Street expectations.

But the unit’s networking revenue has declined sequentially, and the business is more reliant than ever on a small group of customers: cloud service providers. The group, which includes companies such as Microsoft Corp. and Amazon.com Inc.’s AWS, accounted for 50% of data center revenue, up from 45% in the previous period.

Investors hope that number falls to show that the use of artificial intelligence is spreading throughout the economy.

Other recent earnings reports have also sent strong signals for AI. Nvidia customers including Microsoft, Amazon and Meta Platforms Inc. have reiterated their commitment to investing heavily in artificial intelligence infrastructure.

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Nvidia has missed analysts’ quarterly revenue estimates just once in the past five years. In recent times, its performance has exceeded expectations by as much as 20%, setting a high performance standard.

Revenues from its data center division alone currently exceed the combined revenues of rivals Intel and AMD. Net profit this year is expected to exceed revenue from Intel, the chip industry’s largest company in decades.

Nvidia is best known for selling graphics processors, but it has found that the technology is also applicable to artificial intelligence. Its chips help software models learn to recognize and respond to real-world input during training. Nvidia’s components are also used in the systems that run the software, a stage called inference, and help power services like ChatGPT.

The Santa Clara, Calif.-based company has rapidly expanded its product lineup to include networking, software and services as well as fully built-in computer systems. Huang is lobbying around the world for wider adoption of his technology and trying to expand its use among businesses and government agencies.

“The age of artificial intelligence is here, and it’s massive and diverse,” Huang said.

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