Nvidia Shares fell more than 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 weren’t enough to soothe Wall Street amid an already fragile period for stocks. Companies across a range of industries, from trucking to software, have been reeling this year from fears of AI disrupting their businesses. Elevated valuations and high capital costs have set the bar high for these names.
“The debate has shifted away from near-term results and the sustainability of AI capex spending, amid concerns about its quantum, monetization and potential cash flow degradation,” Richard Clode, portfolio manager at Janus Henderson, told CNBC.
Nvidia posted its worst session since April. Other major chipmakers also rolled over: Broadcom Shares fell more than 3% Taiwan Semiconductor Manufacturing It has fallen by 2.8 percent.
Concerns about the Nvidia-OpenAI deal
Investors are pointing to Nvidia’s $100 billion deal with OpenAI as a pain point for the stock.
Nvidia’s 10-K regulatory filing published Wednesday says the company is “finalizing an investment and partnership agreement” with the maker of ChatGPT, adding, “There is no assurance that we will enter into an investment and partnership agreement with OpenAI or that the transaction will be completed.”
Tom Graf, Fassett’s chief investment officer, told CNBC that he expects a “bumpy ride” for the stock over at least the next two quarters.
He said the market expects a good quarter from Nvidia after customers such as Microsoft and Amazon plan to spend more on data centers, but investors are looking for more insight from the chip giant.
“We didn’t get specifics on future guidance,” Graf said. “If players like OpenAI slow spending, that will show in actual revenue one to two quarters from now, so the lack of specifics on the revenue outlook is raising some concerns.”
To be sure, DA Davidson’s Gil Luria said Nvidia provided more detailed guidance for the year than it usually does. He told CNBC that he was optimistic the company would make a big investment in OpenAI despite the “confusing” language in the regulatory filing.
‘The odds are stacked against them’
Market participants are anticipating a potential shift in Nvidia’s AI dominance as the industry shifts from training-heavy demand to decision-driven workloads, which some think could increase competition from alternative chipmakers.
“Where (Nvidia) has missed is easing investor concerns about its narrowing moat in the compute world,” Fundstrat chief financial strategist Hardika Singh wrote in a note to clients on Thursday. In an interview with CNBC, Singh explained that the report shows how “irrational emotions are driving the stock market right now.” He noted that since there are other players in the field, Nvidia cannot emerge as the winner.
Singh said that the architecture of Nvidia’s Vera Rubin chip is specifically designed to be very strong for resolution.
Similarly, Adam Phillips of EP Wealth Advisors and Dan Hanbury, global strategic equity co-portfolio manager at NinetyOne, said they believe Nvidia’s post-earnings response speaks to investor anxiety around the AI business in recent months.
“The odds are stacked against them,” Phillips, the firm’s managing director of investments, told CNBC. “The bar is very high right now considering the growth of this organization and what it’s done here in the last two years.”
“It’s getting harder and harder to hit the road and I think a lot of investors are wondering where they go from here,” he said. “Will all these investments pay off?”
Hanbury noted that while hyperscalers’ free cash flow levels are another point of scrutiny for investors, demand for Nvidia’s core products will be impacted by hyperscaler spending on AI-related capex..
Strong growth strengthens confidence
Analysts across the Street are bullish on Nvidia shares. Of the 66 analysts covering the name, 61 rate LSEG a buy or strong buy. Their average price target suggests potential upside of roughly 37% for the stock, which is little changed over the year.
Janus Henderson’s Clod is optimistic on Nvidia’s upbeat fiscal first-quarter revenue guidance, which was better than analysts’ forecasts. Nvidia’s data center unit fueled its revenue boom in the latest quarter, bringing in 91% of sales. Data center revenue came in at $62.3 billion in the quarter, compared with expectations of $60.69 billion, according to StreetAccount.
“Revenue guidance of $78bn is ahead of even the most bullish buying expectations and is the fourth straight quarter of accelerating growth, contrary to concerns around a slowdown,” Clode said.
