Nvidia's optimistic forecast fails to convince Wall Street

By Arsheeya Bajwa

(Reuters) -Wall Street took a dim view of Nvidia's quarterly forecast on Thursday with investors pushing the stock down more than 8%, piling pressure on the "Magnificent Seven" stocks that have garnered market skepticism in the last three months. 

The stock closed lower at $120.15, while other members of the group such as Microsoft and Amazon also ended the session weaker, after Nvidia's earnings failed to inspire the kind of gains that became a hallmark of the AI rally through 2023 and 2024. 

To be sure, Nvidia's first-quarter revenue forecast was better than market estimates, with CEO Jensen Huang also noting the company was seeing "amazing" demand for its new Blackwell chips.

But growth is slowing. Nvidia's projected revenue increase of about 65% is far from the triple-digit growth that investors have been accustomed to in the past year, while the company also expects gross margin to dip to 71%, the lowest level in at least a year.

Nvidia is viewed as a barometer of the health of AI spending and the two-year boom propelled its valuation to more than $3 trillion. Investors were hoping its results would restart a rally that has sputtered following the "Magnificent Seven" stocks' peaks in late 2024. 

In recent weeks, Chinese startup DeepSeek's low-cost AI model had fanned investor skepticism over the billions of dollars earmarked by Big Tech for AI infrastructure, with many of the stocks still struggling to recoup the losses.

Fears of a pullback in spending on Nvidia's priciest AI chips vaporized more than half a trillion dollars of its stock-market value in a single day last month, a record on Wall Street.

And more recently, an analyst report that Microsoft had cut back on data-center leases reignited concerns over tech companies' spending.  

Nvidia's report was eyed as a bellwether for chip spending on generative AI - and while it indicated demand remains strong, it did not quell concerns among investors who were hoping for more.

"(The) results and guidance were relatively in line with market expectations − not bullish enough to see another beat and raise," said HSBC Global Research analyst Frank Lee.

Nvidia expects total revenue of $43 billion, plus or minus 2% for the first quarter, compared with analysts' average estimate of $41.78 billion, according to LSEG.

The massive revenue surges and beats that had become synonymous with Nvidia, however, are becoming a thing of the past. 

The company's January-quarter revenue of $39.33 billion beat estimates by a margin of 3.4%, compared with a beat of more than 7% in the year-ago period.   

Nvidia's Huang on Wednesday said the company had already pulled in around $11 billion in revenue related to its Blackwell processor in the fourth quarter. 

The world's second-most valuable company has been the top beneficiary of an AI-driven spending spree over the past two years, with its shares gaining more than 400% in that period.

Of the 63 analysts covering the stock, 33 have a "strong buy" rating, as per LSEG data. The median price target stood at $175, implying that analysts expect a 33% increase from the stock's Wednesday close.

Nvidia shares recently traded at about 29 times their forward earnings, down from more than 80 two years ago, as rising earnings pull down the premium at which the stock trades. Rival Advanced Micro Devices trades at about 22 times its forward earnings.   

"At around 30x forward earnings the valuation still doesn't look overcooked," said Derren Nathan, head of equity research at Hargreaves Lansdown.

(Reporting by Alun John in London, Joel Jose, Sruthi Shankar and Arsheeya Bajwa in Bengaluru; Additional reporting by Deborah Sophia; Editing by Amanda Cooper, Saumyadeb Chakrabarty, Sriraj Kalluvila and Daniel Wallis)