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NVIDIA had another blowout quarter for earnings, beating estimates, yet the stock was down 7% in premarket trading.
NVIDIA (NASDAQ:NVDA), the AI chipmaking juggernaut, has performed so well that now more than doubling earnings and beating estimates is not enough. The company did that in the recent quarter and the price of NVIDIA stock fell 7% in pre-market trading after earnings were released Wednesday afternoon.
The numbers were impressive , but that has become the norm for NVIDIA. The AI chipmaker generated $30 billion in revenue in the quarter, another record. Revenue was up 122% from the same quarter a year ago and 15% higher than the previous quarter. Revenue was significantly higher than the $28.7 billion estimates.
Earnings were also through the roof, as NVIDIA generated $16.6 billion in net income, which is up 168% year over year and 12% from the previous quarter. It also comfortably exceeded estimates of $15 billion.
So why did the stock tumble some 7% in after hours trading to $116 per share, before rallying back in early trading Thursday? At market open on Thursday, NVIDIA stock was only down 2.8% to $122 per share.
Record data center revenue
NVIDIA has now cranked out triple-digit revenue growth for four straight quarters. That's not sustainable, yet it seems to have become the expectation among Wall Street analysts and many investors.
NVIDIA earnings continue to be driven by its AI chips at data centers. Data center revenue hit a record $26.3 billion in the quarter, about 88% of all revenue. That's up 154% from the same quarter a year ago and 15% from the first quarter.
And that's not including NVIDIA's newest high performance Blackwell AI chips, as the rollout has been delayed into 2025 because of some reported design flaws that needed fixing.
“Hopper demand remains strong, and the anticipation for Blackwell is incredible,” Jensen Huang, founder and CEO of NVIDIA, said.“NVIDIA achieved record revenues as global data centers are in full throttle to modernize the entire computing stack with accelerated computing and generative AI.”
The one somewhat negative aspect of the report was the gross margin fell to 75.4% from 78.1% in Q1, but it was up from 70.1% in Q2 a year ago. On the earnings call, CFO Collette Kress explained why the gross margin fell sequentially.
“GAAP gross margins were 75.1% and non-GAAP gross margins were 75.7%, down sequentially due to a higher mix of new products within Data Center and inventory provisions for low-yielding Blackwell material,” Kress said.
The results were consistent with what NVIDIA had guided for in Q1, calling for gross margins in the mid-70 percent range in Q3 and Q4 and for the full year.
Outlook better than expected, too
Typically, a disappointing outlook can tank a stock after a good quarter, but that is not the case with NVIDIA.
Revenue is expected to be $32.5 billion in Q3, up 8% from Q2 and some 80% from the third quarter of the previous year. It is also higher than the median revenue outlook among analysts.
However, due to the high expectations NVIDIA has created, perhaps some investors saw the 80% revenue growth expectation as not good enough, compared to the triple-digit increases of past quarters. But keep in mind that those lofty increases are not sustainable year over year.
Gross margins, as mentioned, are predicted to be in the 74% to 75% range, as NVIDIA had previously guided for. These are ridiculously high numbers, but again, down slightly from where they were in Q1. Also, operating expenses are projected to be $4.3 billion, up about 9% from $3.9 billion in Q2.
Why NVIDIA shares were falling
NVIDIA remarkable success has created too high of expectations among Wall Street analysts and investors. Given its lofty valuation, enthusiastic inventors have inflated the stock price over the past couple of years to the point that it became overvalued .
There is really nothing in this report to be concerned about as growth should continue to accelerate, its margins remain high, and it has increased its cash to $34.8 billion.
The big concern comes down to its valuation, which is still high with a P/E of 58, down from 72 after Q1. NVIDIA has corrected since then and I wouldn't be shocked if it corrects again before the end of the year.
NVIDIA is still a great stock and a must own long term, but because it has been overpriced by the market, it will probably have it share of volatility.
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