Nvidia shares dropped 5% on Thursday, as investor concerns around its leadership in the artificial intelligence boom dampened enthusiasm over its earnings beat.
The company reported stellar quarterly results, but the numbers were not enough to assuage Wall Street amid an already fragile time for stocks. Companies across many industries, ranging from trucking to software, have been rattled this year on fears of AI disruption to their businesses. Elevated valuations and high capital expenditures have also set a high bar for these names.
“The debate has shifted away from near-term results and toward the sustainability of AI capex spending, amid concerns around its quantum, monetization and potential cashflow degradation,” Richard Clode, portfolio manager at Janus Henderson, told CNBC.
Nvidia’s decline on the day also pressured several other leading chipmakers. Broadcom shares dropped nearly 6%, while Taiwan Semiconductor Manufacturing dropped more than 3%.
Concerns about Nvidia-OpenAI deal
Investors are pointing to Nvidia’s stalling $100 billion deal deal with OpenAI as a pain point for the stock.
Nvidia’s 10-K regulatory filing published on Wednesday states that while the company is “finalizing an investment and partnership agreement” with the maker of ChatGPT, “There is no assurance that we will enter into an investment and partnership agreement with OpenAI or that a transaction will be completed.”
Tom Graff, chief investment officer at Facet, told CNBC that he expects a “bumpy ride” ahead for the stock for at least the next couple of quarters.
He said that the market expected a good quarter from Nvidia after customers like Microsoft and Amazon projected higher spend on data centers, but investors were seeking more insight from the chip giant.
“What we didn’t get were details about the future guidance,” Graff said. “If players like OpenAI might be slowing spending, that would show up in actual revenue one to two quarters from now, so the lack of specificity about the revenue outlook is generating some concerns.”
To be sure, Gil Luria of D.A. Davidson said that Nvidia provided more detailed guidance for the year than it usually does. He told CNBC that he remains optimistic that the company will be making a large investment in OpenAI despite the “confusing” language in the regulatory filing.
‘Odds were stacked against them’
Market participants are also anticipating a potential shift in Nvidia’s AI dominance as the industry pivots away from training-heavy demand toward inference-driven workloads, which some think could beef up competition from alternative chipmakers.
“Where [Nvidia] did miss was easing investors’ concerns about its narrowing moat in the evolving world of compute,” Fundstrat economic strategist Hardika Singh wrote in a note to clients on Thursday. In an interview with CNBC, Singh explained that the report shows “just how emotions, not logic, is driving the stock market right now.” She noted that just because there may be other players in the field, it shouldn’t mean Nvidia can’t emerge a winner.
Singh added that the architecture of Nvidia’s Vera Rubin chip is specifically designed to be very strong for inference.
Similarly, Adam Phillips of EP Wealth Advisors and Dan Hanbury, global strategic equity co-portfolio manager at Ninety One, said they believe the post-earnings Nvidia reaction speaks to investors’ anxiety around the AI trade in recent months.
“The odds were stacked against them,” Phillips, the firm’s managing director of investments, told CNBC. “The bar is just so high right now considering the growth of this firm and the extent to which it’s run here over the last couple of years.”
“It’s becoming harder and harder to impress the Street and I think that many investors are kind of just wondering where things go from here,” he said. “Is all this investment going to pay off?”
Hanbury noted that hyperscalers’ free cash flow levels is another point of scrutiny for investors, given that demand for Nvidia’s core products is affected by hyperscaler spending on AI-related capex.
Strong growth reinforces confidence
Analysts across the Street remain bullish on Nvidia shares. Of the 66 analysts covering the name, 61 rate it a buy or strong buy, per LSEG. Their average price target implies roughly 37% potential upside ahead for the stock, which is little changed on the year.
Janus Henderson’s Clode is optimistic on Nvidia’s upbeat fiscal first-quarter revenue guidance, which came out well above analysts’ forecast. Nvidia’s data center unit also fueled its revenue boom for the latest quarter, bringing in 91% of sales. Data center revenue came in at $62.3 billion for the quarter, ahead of expectations for $60.69 billion, according to StreetAccount.
“The guidance of $78bn in revenues was well ahead of even the most bullish buyside expectations and the fourth straight quarter of accelerating growth in contrast to concerns around a slowdown,” said Clode.
