Nvidia Forecasts Revenue Surge but Shares Slip on Margin Concerns
Nvidia's Financial Performance and Market Outlook
Quarterly Revenue and Forecasts
Aug 26 (Reuters) - Nvidia's quarterly revenue more than doubled and the chipmaker forecast third-quarter revenue above Wall Street estimates on Wednesday, signaling that demand for its AI chips continued unabated.
Its shares slipped 1% in after-market trading though, as the results did little to ease investor concerns about the AI spending cycle that has powered Nvidia's meteoric rise. The company's gross margin outlook for the current quarter slipped as well.
As of Wednesday's close, Nvidia has gained just 12.4% so far this year, while AMD and Intel have more than doubled.
Nvidia as a Bellwether for AI Market
Results from Nvidia, one of the world's most valuable firms, are considered a bellwether for the AI market as its chips power most of the major data centers and advanced AI models globally.
The report comes weeks after companies including Microsoft and Meta — two of Nvidia's biggest customers — reinforced expectations that Big Tech would spend more than $730 billion on AI infrastructure this year, an unprecedented sum that marks a big step up from last year's $400 billion outlay.
Shifting Spending and Competitive Landscape
In-House Chip Development
An increasing share of tech companies' slated spending is now, however, going towards in-house chip efforts that aim to reduce their reliance on Nvidia's costly and supply-constrained processors.
Financing and Ecosystem Scrutiny
Scrutiny has also mounted of Nvidia's role in the AI boom's complex financing ecosystem after it agreed to guarantee some deals under a new tie-up with six major financial institutions that aims to raise more than $500 billion for AI infrastructure.
Margin Pressures and Revenue Projections
Gross Margin Expectations
The company's margins are closely watched as analysts expect them to be pressured by the production ramp for its Rubin chips and higher memory prices plaguing the silicon supply chain.
Nvidia expects adjusted gross margin to be 74%, plus or minus 50 basis points, for the third quarter. Analysts were expecting 74.77%.
Revenue Forecasts
The company forecast third-quarter revenue of $108 billion, plus or minus 2%, compared with analysts' average estimate of $104.19 billion, according to data compiled by LSEG.
China Market and Regulatory Uncertainty
Sales Outlook in China
Nvidia said it did not assume any data center chip sales from China in its outlook.
Its China business has been highly uncertain. In May, Washington cleared roughly 10 Chinese firms, including Alibaba, Tencent and ByteDance, to buy one of Nvidia's most powerful AI chips, the H200, though deliveries stalled for months.
Nvidia began pitching its new Vera CPU to Chinese clients in June, telling them the chip could be available by August, as China separately weighed allowing top AI firms limited H200 purchases.
Last month, a U.S. commerce department official said shipments had begun but remained "very few."
Competition and Industry Response
Inference Market and Custom Chips
As AI is increasingly used to automate tasks and answer queries, Nvidia's graphics processors face growing competition from central processors and custom chips that are better suited to handle that process — known as inference.
The shift has prompted major technology companies to invest in their own silicon.
Meta and Alphabet Initiatives
Meta plans to begin manufacturing its in-house "Iris" AI chip in September, Reuters exclusively reported, part of a four-generation custom silicon project designed to lower computing costs.
Alphabet has ordered over 3 million chips from Intel for 2028, The Information reported in June, adding that Nvidia is also evaluating the American chipmaker's manufacturing technology to make a processor that combines four GPUs into a single unit.
Other Rivals and Chinese Firms
Rivals Intel and AMD are also targeting the inference market and several Chinese firms including Baidu already produce their own chips for such tasks.
Nvidia's Strategic Moves
Nvidia has taken notice.
In March, it unveiled a new central processor and AI system based on technology licensed from inference-focused startup Groq in a $17 billion deal, pairing Groq's chips with its upcoming Vera Rubin platform.
The company's dominance as the AI market leader was reinforced earlier this month when SpaceX CEO Elon Musk said the rocket firm would exclusively use Nvidia's hardware.
Long-Term Revenue Opportunities and Recent Results
AI Chip Revenue Projections
Nvidia has said the revenue opportunity for its AI chips could exceed $1 trillion through 2027, doubling from the $500 billion opportunity through 2026 that Nvidia cited for its Blackwell and Rubin chips.
Second-Quarter Results
Nvidia's second-quarter revenue more than doubled to $96.22 billion, beating estimates of $92.17 billion. Adjusted profit was $2.22 per share for the three months ended July 26, compared with estimates of $2.10.
Data center revenue also more than doubled to $89 billion, exceeding estimates of $85.08 billion.
The $5.16 trillion company has surged past Wall Street's sales expectations over the past 15 quarters, but the magnitude of the beats has narrowed.
(Reporting by Anhata Rooprai in Bengaluru; Editing by Joyjeet Das)