Why Nvidia Stock Fell Despite Q3 Earnings Beat

Sky-high expectations and margin concerns cast a shadow over another strong quarter of growth for Nvidia, which reported $35 billion in revenue, up 94% year-over-year.

S.C. Atkins November 21, 2024Last Updated: November 21, 2024

4 minutes read

Nvidia Cambridge Supercomputer. — Source: Nvidia

AI darling Nvidia (NASDAQ: NVDA) delivered another record-breaking earnings report on Wednesday for the third quarter ended October 27, 2024. Despite exceeding Wall Street’s estimates on both revenue and EPS, Nvidia stock dropped 2.5% in after-hours trading, leaving investors puzzled. The dip in NVDA shares highlights the challenges of maintaining market momentum in the face of sky-high expectations.

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Nvidia Earnings Highlight Another AI-Driven Quarter

Nvidia reported $35.1 billion in revenue for the third quarter, a 94% year-over-year increase, driven largely by continued demand for its AI-focused data center chips. Net income in Q3 reached $19.3 billion, with adjusted earnings per share (EPS) of $0.81, beating analyst expectations of $0.75 EPS on $33.25 billion in revenue.

The company’s next-generation Blackwell GPUs have started shipping to key customers, including Microsoft (NASDAQ: MSFT), Oracle (NYSE: ORCL), and OpenAI.

“Blackwell is now in the hands of all of our major partners, and they are working to bring up their data centers,” said Nvidia CFO Colette Kress during the earnings call.

However, the fourth-quarter guidance—$37.5 billion in revenue, plus or minus 2%—disappointed some investors. While this forecast exceeded the consensus estimate of $37.1 billion, it represented only 7% sequential growth, the slowest pace in seven quarters.

Margin Pressure and Cost Challenges

One concern cited by analysts is Nvidia’s gross margin, which dipped from 75.7% in the previous quarter to 75%. The company anticipates further compression as it ramps up production of Blackwell chips, which carry higher initial manufacturing costs.

Kress acknowledged these pressures but emphasized the long-term potential while noting that Blackwell’s economies of scale would improve margins by fiscal 2026.

“We will start growing into our gross margins, and we hope to get to the mid-70s quite quickly as part of that ramp,” said Kress.

Third Bridge analyst Lukas Keh pointed out the competitive landscape, stating:

“If a transition towards more complex GPUs are negatively impacting Nvidia’s margins, this confirms Nvidia’s pricing towards Blackwell systems will not be as aggressive initially to spur adoption against competitive threats in the market like AMD.”

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Lofty Expectations Weigh on Nvidia Stock

Nvidia’s stock has nearly quadrupled in 2024, fueled by its dominance in AI technology and partnerships with tech giants like Meta (NASDAQ: META), Apple (NASDAQ: AAPL), and Amazon (NASDAQ: AMZN). But with shares up nearly 200% this year, analysts say the bar for beating expectations has risen to unsustainable heights.

“Investors have become accustomed to huge beats from this company, but doing that is getting harder and harder,” said Ryan Detrick, chief market strategist at Carson Group.

The company’s data center segment, accounting for the majority of its revenue, posted a 112% year-over-year increase to $30.8 billion. Yet, sequential growth in this key segment has slowed, raising questions about whether Nvidia can sustain its breakneck pace.

Broader Market and Supply Chain Impact

Nvidia’s performance and guidance ripple through the broader semiconductor and tech sectors. Shares of Advanced Micro Devices (NASDAQ: AMD) and Taiwan Semiconductor Manufacturing (NYSE: TSM) slipped in response to Nvidia’s report, as did Oracle and Microsoft, two major Nvidia customers.

Supply chain constraints also remain a hurdle.

While refusing to speak on specific TSMC production issues, Nvidia CEO Jensen Huang did provide Reuters with a comment on the situation, stating:

“As we ramp (Blackwell) up, we’ll keep increasing more production lines, and we’ll keep improving our yield, and we improve our cycle time. All of that would improve our outputs.”

Huang dismissed reports of overheating issues with Nvidia’s liquid-cooled systems, asserting:

“There are no issues with our Grace Blackwell liquid-cooled systems. The engineering is not easy at all, because what we’re doing is hard, but we’re in good shape.”

Looking Ahead

Despite near-term challenges, analysts remain optimistic about Nvidia’s long-term trajectory. The company’s gaming segment, which includes GPUs used in Nintendo (OTC: NTDOY) Switch consoles, reported better-than-expected revenue of $3.28 billion.

Nvidia is poised to continue benefiting from AI’s explosive growth, but the market may demand more than just strong numbers.

As Alvin Nguyen of Forrester Research noted:

“The guidance seems to show lower growth, but this may be Nvidia being conservative. Short term, there is no worry about AI demand. Nvidia is doing everything they should be doing.”

With a market cap exceeding $3.5 trillion, Nvidia remains a tech juggernaut. However, as the company navigates production challenges, margin pressures, and sky-high expectations, its stock performance may hinge on whether it can exceed not just forecasts but the market’s lofty ambitions.