Nvidia — the designer of 90% of chips used for artificial intelligence — reported a surge in revenue for the October-ending quarter, according to the New York Times.
The company’s stock price fell more than 2% in after-hours trading in light of Nvidia’s slower-than-expected revenue forecast and potentially declining margins, noted MarketWatch. Yet in November 21 pre-market trading, optimistic analysts sent the stock up nearly 2% — before it fell slightly Thursday morning.
Nvidia shares could be a buy for investors who view these negatives as a temporary interruption to more rapid future growth and higher margins.
Nvidia’s Fiscal Third-Quarter Performance And Forecast
Nvidia’s results for the latest quarter and forecast for the next one exceeded most expectations. Here are the key numbers:
- Q3 2024 revenue: $35.08 billion — up 94% from the year before, and $2.58 billion more than the company’s August forecast, reported the Times.
- Q3 2024 data center revenue: $30.8 billion — up 112% from the year before, the Times noted. The result exceeded the forecast of analysts polled by StreetAccount by $1.98 billion.
- Q3 2024 net income: $19.04 billion — up 106% from the year-ago period, the Times reported.
- Q3 2024 adjusted earnings per share: 81 cents — up 103% from the year before, according to the company, and seven cents per share more than the analyst consensus, according to London Stock Exchange Group.
- Q4 2024 revenue guidance: $37.5 billion — up 70% from the year before and $500 million more than the analysts’ consensus, according to the Times.
“The computer industry has fundamentally changed,” Nvidia CEO Jensen Huang said in Japan last week, the Times reported. “From an industry that produced software, we have become an industry that is manufacturing artificial intelligence.”
What Caused Nvidia Stock To Drop After The Q3 Report?
Nvidia’s performance and prospects are extraordinary in comparison to other companies. However, for publicly traded companies, numbers — not adjectives — determine the direction of a company’s stock price.
When a company’s stock has risen as much as Nvidia’s has — up 203% so far in 2024 to surpass Apple with a stock market capitalization of $3.6 trillion, according to Google Finance — the numerical targets needed to defend such a surge in value are very high.
Nvidia may have disappointed investors in two areas:
- Lower than expected revenue forecast. Nvidia’s Q4 revenue forecast of $37.5 billion fell short of so-called “whisper” numbers in the range of $39 billion to $40 billion. While Nvidia’s forecast beat the consensus by $500 million, investors may have been disappointed since the company’s previous “revenue guidance exceeded estimates by well upwards of $1 billion for five quarters in a row,” according to MarketWatch.
- Falling adjusted gross profit margins. Nvidia’s adjusted gross margins fell for the second quarter in a row and could do so in Q4 as the company aims to ramp up production of its new Blackwell chip — raising the company’s costs, noted MarketWatch. How much? In Q4, Nvidia’s adjusted gross margin is expected to drop “more than three percentage points to 73.6%,” reported Reuters. Moreover, in Q2 2024 Nvidia blamed a $908 million provision related to these challenges for the company’s “narrower profit margins,” according to the Wall Street Journal.
Indeed, both of these problems are attributable to supply constraints on Blackwell, which could take several quarters to resolve.
“The challenge that we have is how fast can we get that supply, getting ready, into the market this quarter,” Nvidia CFO Colette Kress told analysts in the post-earnings conference call. “We’ll be back on track with more suppliers as we turn the corner into the new calendar year. We’re just going to be tight for this quarter.”
The Blackwell problems are reportedly tied to design flaws. When deployed in server racks, the chips overheated, “raising alarms about the ability to integrate them efficiently into existing data center models,” noted Reuters.
Nvidia said such problems are common for such sophisticated systems. “Engineering iterations are normal and expected,” Nvidia’s spokesperson told Reuters. Moreover, the company is committed “to co-engineering with cloud service providers.”
These problems are not a surprise to analysts. To begin shipping this month, Nvidia had to change the Blackwell production process due to a lower-than-needed manufacturing yield, Huang told analysts during an August investor call.
By shipping the first versions of the chip to customers in November, the company fulfilled Huang’s promise, noted the Times.
Where Will Nvidia Stock Go From Here?
While analysts expect Nvidia’s torrid pace of revenue growth to slow, most remain bullish on the stock due to surging revenue, rising margins, continued demand from data centers, higher Blackwell sales, and triple-digit software revenue growth.
Here are some examples:
- Up to $13 billion in Blackwell revenue. Ivana Delevska, founder and chief investment officer of Spear Invest, expects these chips — which are 30 times faster than their predecessors, according to Piper Sandler analysts — to “bring in about $12 billion to $13 billion” in Q4, noted CNBC, which reported Morgan Stanley forecasts much lower Q4 revenue for the product — in the range of $4 billion to $5 billion.
- Surge in demand from data centers. “We expect further upside in 2026 data center momentum,” wrote HSBC analyst Frank Lee in a report cited by CNBC.
- Higher margins, benefit from Trump presidency. Nvidia “is on track to see Blackwell revenue surge, surpassing Hopper revenue by Apr-Q (gross margins to also recover toward mid-70’s by mid-CY [calendar year] 2025),” according to CFRA analyst Angelo Zino’s report feature in Barron’s. “Geopolitical uncertainties remain a headwind, but we think Nvidia is better positioned under a Trump administration.”
- Fast-growing software business. One of the reasons for Nvidia’s success is its CUDA software library — launched in 2007 — which is very popular with application developers, according to my book Brain Rush. The software has become “a really nice multi-billion-dollar annual recurring revenue business, operating at scale, still growing north of 100%,” Gabelli Funds portfolio manager John Belton told CNBC.
With all this optimism, one thing could make Nvidia stock a risky investment — slower growth. The AI chip designer’s revenues grew in a range of 206% to 265% during Q4 2023, Q1 2024, and Q2 2024, according to my August 2024 Forbes post. Nvidia’s forecast of 80% revenue growth in the third quarter represented a marked slowdown from the previous pace.
“It appears the bar was just set a tad too high this earnings season,” Ryan Detrick, chief market strategist at Carson Group, told the Associated Press in August. Nvidia’s forecast of 70% growth in Q4 is a continuation of this deceleration trend.
Nevertheless, analysts see upside in the company’s stock. Based on 42 Wall Street analysts offering 12 month price targets, Nvidia stock would need to rise 13.22% to meet their average stock price target, according to Tip Ranks.