Nvidia’s Forecast Dampens AI Enthusiasm in Other Tech Stocks

Shares of Nvidia and other technology heavyweights fell late on Wednesday, a discouraging sign for investors betting that a strong forecast from the dominant seller of AI chips would fuel fresh gains in Wall Street’s most valuable companies.

Nasdaq futures fell about one percent following Nvidia’s quarterly earnings report, suggesting traders expect tech stocks to lose ground on Thursday.

Nvidia dropped almost seven percent and lost $200 billion (roughly Rs.16,77,898 crore) in stock market value after it forecast third-quarter gross margins that could miss market estimates and revenue that was largely in line. A handful of other AI-related companies shed around $100 billion (roughly Rs. 8,38,948 crore) in combined value. 

Shares of Broadcom and Advanced Micro Devices were each down about two percent. Microsoft and Amazon each dipped almost one percent.

If Wednesday’s late-day dip in Nvidia shares extends into Thursday, it would be well short of the 11 percent price swing the options market had priced for the shares, according to data from options analytics firm ORATS.

Surging demand for its AI chips helped Nvidia crush consensus analyst estimates for several quarters, a trend that led investors to expect the company to exceed forecasts by higher and higher margins.

Nvidia’s soft forecasts overshadowed a beat on second-quarter revenue and adjusted earnings as well as the unveiling of a $50 billion (roughly Rs. 4,19,474 crore) share buyback.

“They beat but this was just one of those situations where expectations were so high. I don’t know that they could have had a good enough number for people to be happy,” said JJ Kinahan, CEO of IG North America and president of online broker Tastytrade.    

The lackluster response to Nvidia’s earnings report could help set the tone for market sentiment heading into what is historically a volatile time of the year. The S&P 500 has fallen in September by an average of 0.8 percent since World War Two, the worst performance of any month, according to CFRA data.

Investors are also watching next week’s US employment report for signs on whether the labor market weakness that roiled stocks in early August has dissipated.

Optimism about AI technology, in part due to Nvidia’s explosive growth, has fueled gains on Wall Street over the past year.

However, confidence in that rally has wavered in recent weeks following an earnings season that saw investors punish shares of tech companies whose results failed to justify rich valuations.

Investors have also become concerned about increases in already hefty spending by Microsoft, Alphabet and other major players in the race to dominate emerging AI technology. Microsoft and Alphabet’s stocks remain down since their reports last month.

Nvidia forecast revenue of $32.5 billion (roughly Rs. 2,72,658 crore), plus or minus two percent, for its fiscal third quarter, compared with analysts’ average estimate of $31.8 billion (roughly Rs. 2,66,785 crore), according to LSEG data. That revenue forecast implies 80 percent growth from the year-ago quarter.

The Santa Clara, California-based company expects adjusted gross margin of 75 percent, plus or minus 50 basis points, in the third quarter. Analysts on average forecast gross margin to be 75.5 percent, according to LSEG data. 

Nvidia’s stock dropped 2.1 percent in Wednesday’s session, ahead of its report. It remains up about 150 percent so far in 2024, making it the biggest winner in Wall Street’s AI rally.

Nvidia’s stock was valued at 36 times earnings ahead of its quarterly report, inexpensive compared to its average of 41 over the past five years. The S&P 500 is trading at 21 times expected earnings, compared to a five-year average of 18.

© Thomson Reuters 2024

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