Earnings report explodes, guidance is strong, but why did NVIDIA's stock price still fall?

NVIDIA's performance in the third quarter, which exceeded expectations as usual, and its strong guidance for the fourth quarter did not lead to further stock price gains. Many investors believe that the previous rally already factored in the expectation of improved company performance, and that even more explosive results are needed to support further stock price increases.

On November 22nd, Beijing time, after the U.S. stock market closed, NVIDIA announced third-quarter revenue of $18.12 billion, a year-on-year increase of 206%, nearly 13% higher than expected, and well above its own guidance range. Non-GAAP adjusted EPS was $4.02, a year-on-year increase of 593%, nearly 20% higher than expected. As for the fourth-quarter guidance, NVIDIA expects FY24Q4 revenue to be $20 billion, with a fluctuation range of plus or minus 2%, equivalent to a guidance range between $19.6 billion and $20.4 billion.

However, after the financial report was released, NVIDIA's stock price experienced significant volatility, dropping 0.9% after hours. The stock price initially rose more than 1% after hours, but quickly fell, with a decline of over 6% at one point. It then slightly rebounded before returning to a downward trend, falling over 1% after hours.

Morgan Stanley analyst Stu Humphrey wrote in a report prior to the release of the financial report:

"At the current level, for NVIDIA to break through $500, it will take more than just beating performance expectations and seeing an increase. We can discuss what growth will look like in 2025, but the information for this quarter is not enough. Everyone knows that the guidance for this quarter will exceed expectations and that NVIDIA has measures to address the gap in China. But who knows what the annual contract value for 2024 will be?"

"I have spoken with many industry insiders who hold a more pessimistic view of the eventual decline after the demand explosion in 2024. It is still impossible to determine whether the revenue volume of the data center business will be $40-50 billion or $80-100 billion."

In addition, Deutsche Bank analyst Jim Reid also believes that NVIDIA's FY24Q1 financial report in May directly triggered the AI hype and established its position as the leader in AI. The stock has already risen by over 240% this year, with investors generally having heavy positions and high expectations. Just beating expectations is not enough; there needs to be a continuous and more explosive beat.

NVIDIA fails to meet investors' higher expectations

Looking at the financial data and guidance alone, NVIDIA's performance is indeed outstanding. However, it is worth noting that NVIDIA's stock price has already more than doubled this year, and its market value has reached $1.2 trillion. Sustained performance far exceeding expectations is needed to drive further increases in the future.

In this financial report, although the company's fourth-quarter guidance of $20 billion is higher than Wall Street's consensus estimate of $17.9 billion, it is lower than the highest estimate of $21 billion. Some investors clearly expected more. They hope that the AI industry will continue to bring explosive sales growth to NVIDIA.

While the performance continues to grow, NVIDIA's business is facing multiple headwinds, and the decline in fourth-quarter guidance is mainly due to the impact of the Biden administration's chip export ban.

The US government updated its chip export restriction policy in October. China and other restricted regions account for about one-fourth of NVIDIA's data center revenue.

NVIDIA acknowledges that although overall demand is strong enough to make up for the gap in GPU sales in China, the export ban may have an adverse impact on performance in the future:

"We expect sales in these regions to decline significantly in the fourth quarter of fiscal year 2024, but we believe that strong growth in other regions will be sufficient to offset this decline."

CFO Colette Kress said that according to US government regulations, when shipping to China and some countries in the Middle East, some exported products require licenses, while other types of chips require advance notification. NVIDIA is working with customers in these regions to seek licenses to ship some of its products and to find solutions that do not trigger restrictions.

In addition, she also stated that NVIDIA is developing new chips that will not trigger export restrictions. These chips will be released in the next few months and will not have a significant impact in the short term. She pointed out that it is too early to predict the impact of such chips on future revenue, as there are too many factors involved.

Jensen Huang: Data centers can grow until 2025

Meanwhile, CEO Jensen Huang strongly refuted doubts about whether the company's data center business has reached its growth peak.

He said that NVIDIA's GPU capacity is constantly increasing, and software vendors, governments, and enterprise customers are expanding their use of AI hardware, which leads him to believe that demand will continue to rise:

"I absolutely believe that data centers can grow until 2025."

In addition, after increasing compensation and hiring new employees, NVIDIA's spending on employees has also increased. Operating expenses have increased by 13% compared to a year ago and 10% compared to the same period last fiscal year.

Geopolitical factors have also pushed up NVIDIA's human resources costs:

"We are monitoring the impact of geopolitical conflicts in Israel and its surrounding areas on our operations, including the health and safety of our approximately 3,400 employees in the region who primarily support the development, operation, sales, and marketing of our networking products... Our operating expenses for the third quarter of fiscal year 2024 include expenses for providing financial support and charitable activities to affected employees."

In early November, NVIDIA released the next-generation flagship chip, the H200 Tensor Core GPU, to replace the H100. It is planned to be released in the second quarter of 2024 and may trigger a new wave of demand. In addition, the company plans to release more high-end AI products in 2024 and 2025.