"AI Faith" Hits a Snag! NVIDIA's Guidance Indicates Slowing Growth, Is the US Stock Market Welcoming a Cooling Signal?

NVIDIA (NVDA.US) latest guidance indicates a slowdown trend after two years of rapid growth, has the "AI faith" been undermined?

NVIDIA, the world's most valuable publicly traded company, has shown a lackluster revenue forecast for the current fiscal quarter, suggesting that after two years of astonishing growth in the artificial intelligence sector, its growth rate is slowing down. The company stated in a release on Wednesday that sales for the third quarter of this fiscal year (ending in October) are expected to be around $54 billion. This figure aligns with Wall Street's average expectations, but some analysts had previously anticipated sales would exceed $60 billion. The forecast does not include revenue from its data center business in China, meaning the current guidance does not consider any sales revenue from H20 in China.

This outlook has intensified concerns about the unsustainable pace of investment in AI systems. Difficulties encountered in the Chinese market have also impacted NVIDIA's business. Although the Trump administration recently eased restrictions on the export of certain AI chips to China, this easing has yet to translate into a rebound in revenue.

According to the Zhitong Finance APP, the company has also approved an additional $60 billion stock repurchase plan. As of the end of the second quarter, there was still $14.7 billion available under NVIDIA's previous repurchase plan.

During the period ending July 27, sales grew by 56% to $46.7 billion, while the average expectation was $46.2 billion. Although this growth resulted in a quarterly revenue increase of over $16 billion compared to the same period last year, it was the smallest increase in more than two years. Adjusted earnings per share were $1.05 (excluding certain items), while analysts had expected $1.01.

Among them, NVIDIA's data center division has now become an independent sector larger than any other chip manufacturer, with sales reaching $41.1 billion, a year-on-year increase of 56%, while the average expectation was $41.3 billion. Gaming-related revenue (previously NVIDIA's main source of income) was $4.29 billion, exceeding the average expectation of $3.8 billion. The automotive business segment's sales were $586 million, slightly below expectations.

Sales in China Affected

NVIDIA is still grappling with the impact of escalating U.S.-China competition, where semiconductor technology has become a major point of contention. In April of this year, the Trump administration tightened restrictions on chip manufacturers exporting data center processors to Chinese customers, effectively excluding NVIDIA from that market. Subsequently, the White House adjusted its stance, stating that the U.S. would allow some shipments but would charge a 15% cut of sales as a condition.

Meanwhile, China is encouraging a reduction in the use of U.S. technology in AI systems used by the Chinese government. These policy changes have made it difficult for Wall Street to predict how much revenue NVIDIA can recover in that market. Some analysts have made predictions of impacts in the billions of dollars, while others have refrained from making any forecasts regarding sales in China until the company's situation becomes clearerNVIDIA stated that in the second quarter, its H20 artificial intelligence chips were not sold to Chinese customers. The company also pointed out that the U.S. government has not formally confirmed the plan to extract 15% profit from sales of artificial intelligence chips to China and denied this.

NVIDIA stated in a document: "Any requests from the U.S. government for a share of revenue could expose us to litigation risks, increase our costs, and harm our competitive position, while benefiting competitors who are not bound by such arrangements."

NVIDIA indicated that ultimately, between $2 billion and $5 billion worth of H20 chips will be shipped to China. The specific amount depends on whether the company can obtain permission from the U.S. government, and currently only a "few" customers have received permission.

Chief Financial Officer Colette Kress stated in a conference call: "If we can receive more orders, we can charge more fees." She also mentioned that the company will continue to urge the U.S. government to approve sales licenses for the more advanced Blackwell chips in China.

Before the earnings report was released, analysts had a forecast range for NVIDIA's third-quarter revenue that differed by about $15 billion—one of the largest such forecast gaps in the company's history.

Is the AI Boom Cooling Down?

Emarketer analyst Jacob Bourne stated in a report that research findings show some signs: if the short-term benefits of artificial intelligence applications remain difficult to quantify, spending by large data center operators may decrease to some extent.

Large cloud service providers account for about half of NVIDIA's data center business. These customers are currently purchasing Blackwell chips, which are the company's latest generation of products. NVIDIA stated that sales of Blackwell increased by 17% compared to the first quarter. In May of this year, NVIDIA announced that sales of its new product line reached $27 billion, accounting for about 70% of data center revenue.

However, NVIDIA's earnings report was released a few weeks after its largest customers (including Meta, Alphabet, Microsoft, and Amazon) announced their performance. These four companies invest billions of dollars each quarter in infrastructure to compete in developing artificial intelligence models and services for consumers and businesses.

Under the leadership of co-founder and CEO Jensen Huang, this 32-year-old chip manufacturer has suddenly become one of the most successful cases in the tech industry. Prior to this, NVIDIA had largely been constrained by larger competitors such as Intel, primarily maintaining slim profits by selling graphics processors to computer gamers.

NVIDIA's significant breakthrough was its transformation of graphics processing units (GPUs) to run artificial intelligence software—something Huang referred to as "accelerated computing."In 2022, NVIDIA's scale was only a fraction of Intel's, with Intel's annual revenue being less than NVIDIA's current quarterly revenue. Now, NVIDIA's annual sales are expected to reach $200 billion—projected to exceed $300 billion by 2028. This would give the company about one-third of the total revenue in the chip industry.

However, NVIDIA's business primarily relies on the procurement plans of a few companies. Microsoft, Amazon, and other large data center operators account for about half of its sales. To diversify its business, Jensen Huang is exploring new markets and offering a wider variety of products. This includes providing complete computers, networking equipment, software, and services. He is determined to promote the widespread application of artificial intelligence in the economy and has urged his team to develop new hardware and software at an extremely fast pace.

Currently, this company headquartered in Santa Clara, California, holds an absolute dominant position in its artificial intelligence chip (i.e., accelerator) market. Internal efforts from companies like Amazon and early challenges from potential competitors such as AMD have not significantly impacted its market share.

Analysis indicates that NVIDIA's forecasts suggest that after experiencing remarkable two years of rapid growth in investment in the artificial intelligence sector, its growth rate is now slowing down.

But it also faces other challenges. In addition to the difficulties NVIDIA encounters in the Chinese market, its biggest obstacle to growth is supply shortages. Like most chip manufacturers, NVIDIA does not have its own factories and relies on outsourced production, primarily sourcing from TSMC. Accelerating the production of new technologies remains an ongoing challenge.

Is it Overvalued?

After NVIDIA's stock price skyrocketed in just three years, making it the highest-valued company in history, investors naturally worry that this artificial intelligence chip manufacturer’s stock price has reached an unreasonable level.

However, according to Wall Street's commonly used metrics for measuring company value, NVIDIA's stock price is not high at all. The recent trading price of this Silicon Valley company’s stock is about 34 times the earnings level analysts expect the company to achieve in the next 12 months.

While a P/E ratio of 34 may seem high for banks, oil producers, or retail chains, such valuations are not uncommon for tech companies with strong quarterly profit growth, and NVIDIA's profit growth rate is indeed very fast.

In contrast, cybersecurity company CrowdStrike (CRWD.US) also released its earnings report this afternoon, and according to LSEG data, its stock price has exceeded 400 times its expected earnings. NVIDIA's competitor chip manufacturer AMD has a stock price of about 32 times its expected earningsIt is crucial to note that NVIDIA's price-to-earnings (P/E) ratio is currently lower than many periods in its own history. Its P/E ratio soared to nearly 70 times in 2021, when the demand for the company's gaming processors surged during the pandemic, leading to a significant increase in NVIDIA's stock price. However, according to data from LSEG, its recent P/E ratio is below its own average P/E ratio of 36 times over the past five years.

Nevertheless, the company's stock price has risen by 35% this year, pushing its market capitalization above $4 trillion. After several years of continuous growth, investors have become more discerning about its performance, especially given the high valuations in the U.S. stock market, where any minor misstep in the company's performance could lead to market dissatisfaction.

Stock Price Decline Pulls Down U.S. Stock Market

"The ripple effect triggered by NVIDIA may be more interesting than the actual movement of NVIDIA's stock price itself," said Chris Murphy, co-head of derivatives strategy at the well-known Wall Street market maker Susquehanna.

NVIDIA's earnings report is crucial for whether the U.S. stock market, and even the global stock market, can continue the "super bull market" that has been ongoing since April. It is the market's expectations for the sustained explosive growth in global AI computing infrastructure demand that have driven NVIDIA's market capitalization to surpass $4 trillion, and this strong expectation is now pushing NVIDIA towards a $5 trillion market cap.

Given NVIDIA's high weight in the S&P 500 index—alongside Apple and Microsoft as the largest components—and its core importance in the global AI computing industry chain, NVIDIA has long been under exceptionally high expectations from Wall Street analysts and investors. Since 2023, NVIDIA has consistently maintained a trajectory of explosive earnings growth, rarely disappointing analysts and investors in quarterly financial data and performance outlooks. This has been the core supporting logic for the ongoing AI investment boom that began in early 2023.

However, after the earnings announcement, NVIDIA's stock price fell by about 3% in after-hours trading. U.S. stock index futures also declined, with the futures contract price for the Nasdaq 100 index dropping by 0.4%. Following the S&P 500 index reaching a historic high, the U.S. stock market experienced a decline in late trading.

NVIDIA's cautious forecast for the market outlook has raised concerns that the momentum of significant investment growth in the artificial intelligence sector may be waning, leading to doubts about the sustainability of this key market driver this year. Since April, global stock markets have continued to rise, with investors betting that the AI boom will continue to drive earnings growth for technology companies, although the easing of trade tensions has also boosted overall risk appetiteCapital.com Senior Market Analyst Kyle Rodda wrote: "This information has intensified concerns about a slowdown in investment in the artificial intelligence sector and a potential slowdown in future economic growth. As the stock has nearly reached its historical peak, several minor flaws in the results have led to a decline in the stock price, which may affect the overall market sentiment today."