Nvidia's quarterly outlook released on Wednesday did not align with the high expectations set by investors, who have significantly driven up the company's stock in anticipation of advancements in generative artificial intelligence. Following the announcement, shares of the semiconductor manufacturer dropped by 6% in after-hours trading, negatively impacting other chipmakers as well. This report has been perceived as a pivotal moment for the technology sector, with results being viewed as mixed despite impressive growth and profitability.

"The concern is clear," stated Ryan Detrick, chief market strategist at the Carson Group. "The magnitude of the earnings beat this time was considerably less than what we've been accustomed to." He further noted, "Although future guidance was improved, it did not match the increases seen in prior quarters. This is a remarkable company still experiencing a revenue growth rate of 122%, but it seems the expectations were set slightly too high for this earnings season."

The revenue and gross margin projections for the upcoming quarter were closely aligned with analysts' forecasts but did not meet the recent trend of significantly exceeding Wall Street's predictions. This overshadowed a positive report on second-quarter revenue and adjusted earnings, as well as the announcement of a $50 billion share repurchase program. Over the past three quarters, Nvidia has achieved revenue growth exceeding 200%, yet the company's ability to consistently exceed estimates is becoming increasingly precarious as each success leads Wall Street to elevate its expectations further.

CEO Jensen Huang emphasized the relentless demand for the company's high-performance graphics processors, which have become essential for generative AI technologies like OpenAI's ChatGPT. During a conference call with analysts, he remarked, "You have more on more on more," highlighting the increasing demand.

Huang acknowledged reports indicating a delay in the production ramp-up of Nvidia's next-generation Blackwell chips until the fourth quarter but minimized its significance, noting that customers were eagerly purchasing the current-generation Hopper chips. The company announced that it was sending out Blackwell samples to partners and clients after making design adjustments, anticipating several billion dollars in revenue from these chips in the fourth quarter.

Shares of chip manufacturers, including Advanced Micro Devices and Broadcom, experienced a decline of nearly 4%. Asian chipmaker SK Hynix saw a drop of 4.5%, while Samsung's shares fell by 2.8% during Thursday morning trading in Asia.

Investor Anxiety

The outlook from Nvidia is critical, as the company's stock has skyrocketed over 150% this year, contributing an impressive $1.82 trillion to its market capitalization and propelling the S&P 500 to record levels. However, if the losses observed in after-hours trading on Wednesday persist, Nvidia could see a significant decline of $175 billion in market value.

This forecast may raise new worries regarding the slow returns on investments in generative AI, prompting some investors to reconsider the substantial funds being allocated to data centers by major tech firms. These apprehensions have created turbulence in the AI sector's rally in recent weeks.

Nvidia's primary clients—Microsoft, Alphabet, Amazon, and Meta Platforms—are projected to spend over $200 billion on capital expenditures in 2024, primarily focused on developing AI infrastructure.

In after-hours trading on Wednesday, shares of these companies experienced a slight decline of less than 1%.

According to eMarketer analyst Jacob Bourne, “This reflects increasing investor anxiety about the long-term sustainability of the generative AI market, with Nvidia's performance appearing to be a pivotal factor for the entire sector.”

Additionally, Nvidia is under regulatory examination concerning its business practices. In its quarterly report, the company disclosed that it has received information requests from regulators in the U.S. and South Korea related to “GPU sales, supply allocation efforts, foundation models, and our investments, partnerships, and agreements with firms developing foundation models.” Previously, inquiries had only been reported from the EU, UK, and China.

Last month, Reuters reported that France's antitrust authority was preparing to file charges against Nvidia for alleged anticompetitive behavior. Additionally, earlier media reports indicated that U.S. regulators were investigating whether Nvidia was attempting to bundle its networking products with its highly sought-after AI chips.

Nvidia anticipates an adjusted gross margin of 75%, with a variance of 50 basis points, for the third quarter. Analysts, on average, project a gross margin of 75.5%, based on LSEG data. In the second quarter, Nvidia reported a gross margin of 75.7%, slightly below the average estimate of 75.8%.

Nvidia's gross margin continues to surpass that of its competitors, bolstered by the high prices of its advanced chips. For comparison, AMD reported an adjusted margin of 53% in its fiscal second quarter.

The company has forecasted third-quarter revenue of $32.5 billion, with a 2% margin of error, which is higher than analysts' average estimate of $31.77 billion, according to LSEG data.

In the second quarter, Nvidia achieved revenue of $30.04 billion, exceeding estimates of $28.70 billion. Excluding certain items, the company reported earnings of 68 cents per share for the second quarter, surpassing the expected 64 cents.

Nvidia's data center segment saw a remarkable 154% increase in sales, reaching $26.3 billion for the quarter ending July 28, which was above the estimated $25.15 billion. This represents a 16% increase from the first quarter.

The company also generates revenue from chip sales to the gaming and automotive sectors.