Nvidia revenue triples but fails to satisfy lofty investor expectations for AI boom

SAN FRANCISCO – Nvidia investors gave a cool reaction to its latest quarterly report, which blew past average analysts’ estimates but failed to satisfy the loftier expectations of shareholders who have bet heavily on an artificial intelligence (AI) boom.

Revenue in the current period will be about US$20 billion (S$26.8 billion), the world’s most valuable chipmaker said on Nov 21 in a statement. Although that topped the average Wall Street prediction of US$17.9 billion, some projections reached as high as US$21 billion.

After sliding as much as 6.3 per cent in late trading, Nvidia shares settled down to a decline of about 1 per cent.

AI has been the hottest topic for tech investors in 2023, and every major company has talked up its capabilities in that area. But Nvidia is one of the few businesses making serious money from the trend, which has accelerated since the public debut of OpenAI’s ChatGPT in November 2022. That tool helped show the potential of generative AI to a broader audience.

While Nvidia posted another quarter of impressive growth, some investors were clearly anticipating more. They have poured money into the stock in 2023 – sending it up 242 per cent – on the hopes that the AI industry would bring explosive sales gains for Nvidia. This means Nvidia shares were priced at a level that required an absolutely perfect outcome, analysts have said.

Nvidia shares had closed at US$499.44 in New York on Nov 21 before the report. The company has been the best-performing stock on the Philadelphia Stock Exchange Semiconductor Index in 2023, sending its valuation to more than US$1.2 trillion.

In fact, Nvidia’s market capitalisation is now more than US$1 trillion bigger than that of rival Intel, which until recently was the world’s largest chipmaker.

Nvidia chief executive officer Jensen Huang has parlayed a prowess in graphics chips into a leading role in what he calls accelerated computing. The company’s processors, which crunch more data by performing calculations in parallel, have become the go-to tool for training AI services.

In the fiscal third quarter, which ended on Oct 29, revenue more than tripled to US$18.1 billion, the company said. Profit was US$4.02 a share, minus certain items. Analysts had predicted sales of about US$16 billion and earnings of US$3.36 a share.

Nvidia’s data centre division, the star performer in its operations, had US$14.5 billion of revenue, up 279 per cent from the same period a year earlier. The company’s personal computer unit, meanwhile, has rebounded from an industrywide slowdown. Its revenue rose 81 per cent to US$2.86 billion.

Nvidia’s success in selling AI chips to companies such as Microsoft and Alphabet’s Google has also made it a target. Microsoft unveiled its own in-house AI processor last week, following a similar effort by Amazon.com’s AWS. This quarter, Advanced Micro Devices will also debut a competitor to Nvidia, called the MI300. But Nvidia is not standing still. It recently unveiled a successor to its prized H100 chip dubbed the H200, which will be available in early 2024.

Another threat to Nvidia’s business has come in the form of US curbs on exports to China, the largest market for chips. The Biden administration has restricted the sale of some of Nvidia’s best products on national security grounds.

The United States government recently updated its rules governing such exports in October, aiming to make the restrictions harder to circumvent. Nvidia said that the changes will not affect its sales for now, given the insatiable demand for its products elsewhere. But they are forcing it to rejig operations and could have an impact down the road.

Nvidia reiterated on Nov 21 that the requirements did not have “a meaningful impact” in the last quarter. But China and other areas affected by the curbs have accounted for about a quarter of its data centre revenue.

“We expect that our sales to these destinations will decline significantly in the fourth quarter of fiscal 2024, though we believe the decline will be more than offset by strong growth in other regions,” the company said.

Chief financial officer Colette Kress said that US rules require licences on some exports and advanced notification for other types of chips when shipping to China and some countries in the Middle East. The company is working with customers in those regions to try to secure permission to ship some of its products and on “solutions” that will not trigger restrictions.

The fourth-quarter drop in China, “though not concerning for the near term, will likely be an area of investor focus”, Bloomberg Intelligence analysts said in a note.

Nvidia said it is spending more on employees after raising pay and hiring new staff. Operating expenses rose 13 per cent from a year ago and are up 10 per cent from the prior period.

The company is also spending more to look after workers in Israel.

“We are monitoring the impact of the geopolitical conflict in and around Israel on our operations, including the health and safety of our approximately 3,400 employees in the region who primarily support the research and development, operations, and sales and marketing of our networking products,” Nvidia said. “Our operating expenses in the third quarter of fiscal 2024 include expenses for financial support to impacted employees and charitable activity.” BLOOMBERG