Nvidia AI chips boost profits, but what about sales growth?

Max A. Cherney, Arsheeya Bajwa and Stephen Nellis
| Reuters

Demand for Nvidia’s AI chips still booming but slowing sales growth worries investors

Nvidia NVDA.O forecast its slowest revenue growth in seven quarters on Wednesday as the artificial intelligence chipmaker failed to meet the high expectations of some investors that made it the most valuable company in the world. world.

Shares of the Santa Clara, Calif.-based company fell 5% after its earnings release, but quickly pared their losses to trade down 2.5% after the close. During the regular session, they closed down 0.8%.

Expectations were high ahead of the results, with Nvidia shares rising more than 20% over the past two months and hitting an intraday record on Monday. The stock has nearly quadrupled this year and has risen more than ninefold over the past two years, giving it a market value of $3.6 trillion.

Nvidia is launching its powerful Blackwell family of AI chips, which will initially weigh on the company’s gross margins but will improve over time.

The new line of processors has been adopted by Nvidia’s customers and the company will exceed its initial guidance by billions of dollars in processor sales in the fourth quarter, Chief Financial Officer Colette Kress told analysts on a conference call Wednesday.

Asked about media reports that a flagship liquid-cooled server containing 72 of the new chips was experiencing overheating issues during initial testing, CEO Jensen Huang said there were no issues and that customers such as Microsoft MSFT.O, Oracle ORCL.N and CoreWeave implemented the systems.

“There are no problems with our Grace Blackwell liquid-cooled systems,” Huang told Reuters. “Engineering is not easy at all, because what we do is difficult, but we are in good shape.”

Initially, its Blackwell family of chips will generate gross margins in the 70% range, but they will increase to 70% as production ramps up, Kress said.

The company forecast fourth-quarter revenue of $37.5 billion, plus or minus 2%, compared with an average analyst estimate of $37.09 billion according to data compiled by LSEG.

While that’s still a stunning growth rate thanks to huge demand for the company’s chips that make up the brains of complex generative AI systems, it marks a sharp slowdown from previous quarters , when Nvidia had mostly seen sales that had at least doubled.

Nvidia’s fourth-quarter forecast indicates that the company’s revenue growth will slow to around 69.5%, down from 94% in the third quarter.

“Investors have become accustomed to this company’s enormous struggles, but it’s getting harder and harder,” said Ryan Detrick, chief market strategist at Carson Group. “It’s still a very strong report, but the truth is that when the bar is this high, things are even more difficult.”

The slowdown in revenue growth, however, masks the huge demand for the company’s AI chips, which dominate the market.

Supply chain problems have made it harder for Nvidia to report the sharp revenue declines that have helped make it a Wall Street darling. But growth could resume if the company’s margins exceed 75%, said Brandon Hoff, an analyst at IDC.

One of the bottlenecks for its chip supply has been limited capacity for advanced manufacturing techniques at the company’s manufacturing partner, TSMC 2330.TW.

Huang declined to comment on specific production issues with TSMC, but also told Reuters that “as we accelerate (Blackwell), we will continue to increase the number of production lines, and we will continue to improve our throughput and our cycle time. this would improve our results.

Yield refers to the number of working chips per wafer. The company said it fixed a design flaw in its Blackwell chips by changing the blueprints TSMC used to make them.

Shares of TSMC were down about 1% in early Asian trading Thursday.

Nvidia reported third-quarter adjusted earnings of 81 cents per share, compared to 75 cents per share expected.

Sales in the data center segment, which accounts for the majority of Nvidia’s revenue, increased 112% to $30.77 billion in the quarter ended October 27. The segment had recorded a growth of 154% in the previous quarter.

Nvidia’s sales are being boosted by cloud companies’ continued spending on chips as they develop data centers capable of handling the complex processing needs of generative AI.

The company said adjusted gross margin fell to 75%.

Reporting by Arsheeya Bajwa in Bengaluru and Stephen Nellis and Max A. Cherney in San Francisco; Additional reporting by Noel Randewich in Oakland, California; Editing by Sayantani Ghosh, Matthew Lewis and Jamie Freed