Nvidia Fails to Satisfy Lofty Investor Expectations for Ai Boom

Investors in Nvidia Corp. responded with a measured reception to the company's latest quarterly report, which surpassed the average estimates of analysts but fell short of the heightened expectations of shareholders who had heavily invested in the artificial intelligence (AI) boom. The world's most valuable chipmaker announced that revenue in the current period is anticipated to be around $20 billion, exceeding the average Wall Street prediction of $17.9 billion, though some projections had reached as high as $21 billion.

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Despite this robust performance, Nvidia's shares experienced a 3% decline to $484.42 in New York, marking the most significant intraday drop in three weeks. Investors, who have driven the stock up by 242% this year, had set high expectations based on the belief that the AI industry would continue to deliver substantial sales gains for Nvidia. Consequently, the shares were priced at a level requiring an exceptionally perfect outcome, according to analysts.

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Notwithstanding the lofty expectations, Wolfe Research analyst Chris Caso acknowledged the remarkable nature of Nvidia's results in a note to clients, emphasizing that the numbers were particularly impressive considering the impact of U.S. restrictions on sales to China. Caso also highlighted Nvidia's introduction of new chips designed for the Chinese market, potentially aiding a rebound.

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Nvidia's market capitalization, now exceeding $1 trillion, has surpassed that of rival Intel Corp. by over $1 trillion, making it the best-performing stock on the Philadelphia Stock Exchange Semiconductor Index this year. CEO Jensen Huang's strategic focus on accelerated computing, leveraging the company's prowess in graphics chips, has positioned Nvidia at the forefront of AI development. The processors, known for their parallel processing capabilities, have become pivotal in training AI services.

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In the fiscal third quarter, ending October 29, Nvidia reported revenue more than tripling to $18.1 billion, with a profit of $4.02 per share, excluding certain items. Analysts had anticipated sales of approximately $16 billion and earnings of $3.36 per share. The data center division, a standout performer, achieved $14.5 billion in revenue, a 279% increase from the same period the previous year. The personal computer unit rebounded from an industrywide slowdown, experiencing an 81% revenue increase to $2.86 billion.

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Nvidia's success in selling AI chips to major companies, including Microsoft Corp. and Alphabet Inc.'s Google, has made it a target for competition. Despite recent challenges, such as Microsoft's introduction of an in-house AI processor, and U.S. restrictions impacting sales to China, Nvidia remains innovative. The company unveiled a successor to its H100 chip, the H200, expected to be available early next year.

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While China's curbs on exports pose a threat to Nvidia's business, the company stated that the recent changes in rules governing exports had not significantly impacted last quarter. However, China and other affected regions accounted for about a quarter of its data center revenue. Nvidia anticipates a significant decline in sales to these destinations in the fourth quarter of fiscal 2024, offset by robust growth in other regions.

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Nvidia CFO Colette Kress detailed the challenges posed by U.S. rules, requiring licenses for some exports and advanced notification for specific types of chips shipped to China and select Middle Eastern countries. The company is actively working with customers in these regions to secure permissions and explore alternative solutions to avoid triggering restrictions.

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Despite concerns about the fourth-quarter drop in China, Nvidia remains optimistic about future growth, emphasizing its confidence in data center expansion due to increased demand for AI hardware. CEO Huang dismissed suggestions of reaching peak growth, affirming that the data center business could continue growing through 2025, supported by increased supply and expanding use of AI hardware.

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Nvidia's commitment to employee well-being and geopolitical awareness was also highlighted. The company acknowledged monitoring the impact of the geopolitical conflict in and around Israel, allocating resources to support affected employees and engage in charitable activities.

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In the broader context, AI has been a focal point for tech investors in 2023, with Nvidia standing out as one of the few companies translating AI capabilities into significant financial success. The acceleration of the AI trend, exemplified by OpenAI's ChatGPT in November 2022, has positioned Nvidia at the forefront of the industry, demonstrating the practical potential of generative AI to a wider audience.

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