Nvidia Shares Drop After Forecast Short of Expectations

By Deborah Mary Sophia, Noel Randewich, and Saqib Iqbal Ahmed

(Reuters) – Nvidia shares dropped more than 6% on Thursday after its forecast fell short of lofty expectations. However, some believe the modest sell-off shows that investors remain confident in the generative AI boom that has powered the chip giant’s stock higher all year.

The company on Wednesday forecast third-quarter gross margins that could miss market estimates and revenue that was largely in line. But some investor concerns were alleviated after Nvidia said it expects production of its next-generation Blackwell chips to ramp up in the fourth quarter.

Shares of other chip companies were mixed; Broadcom (NASDAQ:AVGO) shares ended 0.8% lower, while Advanced Micro Devices (NASDAQ:AMD) fell 0.6%. Shares of Arm rose 5.3%.

Nvidia’s shares remain up 137% this year, making it a pillar of the rally in U.S. stocks. These gains have been driven by a series of blowout quarterly revenue forecasts, leading investors to build greater expectations for growth.

“They beat but this was just… 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 forecast followed strong second-quarter earnings that topped Wall Street projections, alongside a new $50 billion share buyback announcement.

“Investors want more, more and more when it comes to Nvidia (NASDAQ:NVDA),” said Dan Coatsworth, investment analyst at AJ Bell.

Nvidia forecast revenue of $32.5 billion (plus or minus 2%) for its fiscal third quarter, compared with analysts’ estimates of $31.8 billion. This forecast implies 80% growth from the year-ago quarter but was below the top-end of market estimates at $37.90 billion.

BUYING OPPORTUNITY?

Some analysts saw the dip as a buying opportunity.

“Nvidia has had much bigger drawdowns on (earnings) reports … we think the sell-off is an opportunity to accumulate the stock,” said Nancy Tengler, CEO of Laffer Tengler Investments.

Some Big Tech stocks shrugged off the weakness, suggesting that investors may not see the report as a bad sign for the AI boom. Shares of Amazon.com (NASDAQ:AMZN) and Apple (NASDAQ:AAPL) closed higher, while Alphabet (NASDAQ:GOOGL) dipped 0.7%.

“The long-term AI story is still intact. It’s just a bit of a relief that the numbers weren’t disastrous,” said Ben Barringer, analyst at Quilter Cheviot.

Concerns about slow payoffs from hefty AI investments have affected large tech companies recently, with shares of Microsoft (NASDAQ:MSFT) and Alphabet trading lower since their quarterly reports last month.
A delay in ramping up production of Nvidia’s Blackwell chips until the fourth quarter wasn’t seen as a major concern, as demand for its current-generation Hopper chips remains strong.

However, some analysts expressed worries about rising regulatory scrutiny after Nvidia disclosed information requests from U.S. and South Korean regulators, adding to inquiries from the EU, UK, and China.

“After the DOJ win over Google, large-cap tech has to be more cognizant of regulatory intervention… investors need to pay more attention,” Barringer said.

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

Nvidia was valued at 36 times earnings ahead of its quarterly report, which is inexpensive when 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.