Why Nvidia Shares Dip Despite Better-than-expected Earnings
Nvidia exceeded analyst expectations for its third-quarter earnings, reporting adjusted earnings per share and revenue that were significantly higher than the same period last year. This comes as the AI industry continues to grow at a rapid pace.
After sliding as much as 6.3% in late trading, the shares settled down to a decline of about 1.7%.
• The company expects a steep drop in fourth-quarter sales in China - a key revenue generator - in the wake of new U.S. rules, but forecast overall revenue above Wall Street targets as supply-chain issues ease, chief financial officer Colette Kress said on an earnings call.
• The company also faces risks in Israel, whose military is embroiled in a conflict in Gaza and where Nvidia's networking business is headquartered.
Nvidia's Earnings
Nvidia reported net income of $9.24 billion on diluted EPS of $3.71 per share, up 1,274% compared with this time last year. Revenue soared by 206% to $18.12 billion amid massive data center revenue gains.
The success of Nvidia's data center business has been instrumental in providing popular services such as cloud and AI, with data center revenue reaching a record $14.51 billion in the latest quarter. This is much higher than last year's $3.8 billion and also exceeded the $12.7 billion estimated by analysts.
Among chipmakers, Nvidia is one of the best-positioned companies to benefit from the ongoing surge of interest in AI, with its products being in high demand and enjoying up to 95% market share in the AI chip space.
Two Major Concerns
• Nvidia warns that sales to destinations like China, the target of Biden's chip controls, will 'decline significantly'
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," Nvidia's finance chief, Colette Kress, said in a letter to shareholders.
In response to the newest round of U.S. export rules, Nvidia has already come up with three new products for the Chinese market. But those China-focused chips could consume vital research resources at Nvidia and could end up banned just like its first round of China market chips, said Jacob Bourne, analyst at Insider Intelligence.
Kress said Nvidia did not have good visibility into their impact on its sales to China even over the longer term, and that while new regulation-compliant chips may become available in the coming months, "we don't expect their contribution to be material or meaningful". Guidance for the current quarter could have been "a little higher" without the new restrictions, she conceded.
Nvidia was "going to make sure that we are in full discussions with the US government" about the new products, she added.
• Risks of Israel-Hamas War
Nvidia faces risks in Israel, where its networking business is headquartered and sales from the unit have risen 155% since last year. The equipment produced by this unit is used in AI supercomputers. However, as Israel's military is currently engaged in a conflict in Gaza, a significant portion of Nvidia's employees based in Israel have been called up to active military duty. If the war continues, their absence could adversely affect Nvidia's future operations. Kress, the company's CFO, stated that the networking business has exceeded a $10 billion annualized run rate.
However, Israel and Hamas have agreed to a humanitarian pause in Gaza that will last for at least four days, according to the Qatari government. The start of the temporary cease-fire will be announced within 24 hours, the agreement said.
It comes after Hamas political leader, Ismail Haniyeh, said that the Palestinian militant group and Israel were "close to reaching a truce agreement."
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."
The AI Race
Nvidia's chips are used in generative AI training models, and it wields a virtual monopoly on them — with the likes of Microsoft, AMD and Intel racing to catch up.
Last week, Nvidia introduced a new AI chip called the H200, which will offer superior performance to Nvidia's current top H100 processor. The H200 includes additional high-bandwidth memory, one of the most expensive parts of the chip, which determines how much data it can crunch quickly.
$Advanced Micro Devices (AMD.US)$ had previously highlighted the amount of high-bandwidth memory on one of its rival AI chips. Meanwhile, tech giants such as $Alphabet-A (GOOGL.US)$, $Amazon (AMZN.US)$, and most recently $Microsoft (MSFT.US)$, have announced custom AI chips developed in-house while also using Nvidia hardware in their own data centers.
While building customized chips can be expensive, costing hundreds of millions of dollars and taking years, it allows cloud companies to incorporate features specific to their AI needs. Earlier this month, Microsoft unveiled two custom-designed computing chips, one of which is capable of running large language models.
As U.S. pressure makes accessing Nvidia chips more difficult, Chinese tech company Huawei's AI chip is also gaining popularity among local firms.
What Analysts Say
GPU demand continues to outpace supply as Gen AI adoption broadens across industry verticals," Raymond James' Srini Pajjuri and Jacob Silverman wrote in a note Monday to clients, with a "strong buy" recommendation on Nvidia stock. "We are not overly concerned about competition and expect NVDA to maintain >85% share in Gen AI accelerators even in 2024."
Setting aside the outsized expectations, Nvidia's results continue to be astounding," Wolfe Research analyst Chris Caso said in a note to clients, "the numbers are particularly impressive given that US restrictions on China are hurting sales," he said. Moreover, Nvidia announced new chips designed for China on Tuesday that could help that market rebound, he noted.
The fourth-quarter drop in China, though not concerning for the near term, will likely be an area of investor focus," Bloomberg Intelligence analysts Kunjan Sobhani and Oscar Hernandez Tejada said in a note.
Nvidia chief executive Jensen Huang emphasised that the explosion of AI products was still in its early stages. Software companies were realising that they were "sitting on a gold mine" of information that they could develop into their own custom AI products, he said, and a wide range of businesses were moving to build their own custom AIs.
Source: Bloomberg, Nvidia, CNBC, Yahoo Finance, REUTERS, Investopedia, Financial Times, Fortune
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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DAVIDJ94 : Accurate but not what I want to see. Lol.