Nvidia pays price of lofty expectations, stoking fear for rivals

Nvidia Corp.’s earnings report needed to be perfect for a stock that’s added nearly $2 trillion in market value in the past year. In the end, a broad beat still sparked a selloff.

At issue is Nvidia’s revenue forecast. While easily exceeding the average analyst estimate, the beat was far narrower than investors have grown to expect over the past five earnings reports. That, and an acknowledgment that the new Blackwell chip hit production snags, was enough to send Nvidia shares tumbling in postmarket trade Wednesday, with declines resuming in premarket Thursday.

The concern is that if Nvidia – the biggest beneficiary of AI spending and a stock central to the S&P 500’s gains this year – is having trouble living up to lofty expectations, that doesn’t bode well for other gear makers. Broadcom Inc., Advanced Micro Devices Inc. and Micron Technology Inc. also slipped in premarket.

“It’s not entirely surprising to see it trade down on these results because it is the smallest beat that we’ve seen in a while,” said Ivana Delevska, founder and chief investment officer of Spear Invest.

The reaction to the report signals that the AI giant’s valuation may have topped out for the time being, at least until more is known about the availability of the Blackwell chip. Chief Executive Officer Jensen Huang said supplies will be plentiful when manufacturing picks up, but his comments did little to quell concerns.

After rallying back from a steep selloff earlier this month amid macroeconomic worries and concerns about the longevity of big spending on AI, Nvidia shares closed on Wednesday priced at 37 times forward earnings. That’s down from a recent high of 44 times in June, according to data compiled by Bloomberg.

Nvidia’s forecast for third quarter revenue to be about $32.5 billion exceeded the average analyst estimate by $600 million. Still, that was the narrowest beat since February 2023, back when Nvidia’s market value was around $500 billion. It closed on Wednesday with a market value of about $3.1 trillion.

“AI is still there, but I think people got a little too excited, a little too over-hyped in terms of what we can expect in the near term,” said Michael Matousek, head trader at U.S. Global Investors Inc.

The report capped off a volatile earnings season and showed just how high expectations have become. In the weeks leading up to Nvidia’s results, the chipmaker helped drag the S&P 500 down more than 8% from a July peak before rallying back as concerns about AI spending subsided and readings on the health of the US economy quelled recession fears.

The results will also do little to reset the company’s valuation. In previous quarters, Nvidia’s large beats on guidance, signaling bigger revenue growth to come, compressed the multiple. After this report, it looks like the ratio relative to projected profits should stay about the same as shares fall and earnings estimates tick up only slightly.

That may calm some fears about a bubble, at least for now.

“People say these AI hardware stocks are in a radical bubble, but they’re trading under 40 times estimated earnings,” said Tony Kim, lead portfolio manager and head of the global technology team at BlackRock, noting that this contrasted with the more than 100 times forward earnings seen during the dot-com era.

Still, there was still plenty for Nvidia investors to like, with some analysts viewing the share slump as likely short-lived. On top of handily beating second quarter estimates for revenue and profits, the company authorized an additional $50 billion for share repurchases.

“Expectations become more challenging as the superlative becomes mundane,” Morgan Stanley analysts led by Joseph Moore noted. “This was still a very strong quarter given the transitional nature of the current environment.”