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Nvidia: From Gaming Components to AI Giant, Why Did Its Stock Drop After Wednesday's Earnings Report?

AInvestFriday, Aug 30, 2024 5:43 am ET
3min read

In the tech world, the name Nvidia Corp is no longer an unfamiliar entity. From a niche gaming component supplier to a $3 trillion tech giant, Nvidia's rise is nothing short of legendary. However, despite repeatedly setting records, the company's stock fell by 6.38% on Wednesday following its recent earnings report. What exactly happened? Let's dive in.

Dominance in Data Centers

Nvidia's latest earnings report shows that its data center business revenue reached an astonishing $26.3 billion, more than 2.5 times the figure from the same period last year. This explosive growth in the data center business is primarily driven by the global surge in demand for artificial intelligence (AI) and big data. AI has become the new darling of the tech world, and Nvidia is at the heart of this AI revolution.

Despite this, Nvidia's gross margin slightly declined, with the latest quarter's gross margin at 75.1%, down 3 percentage points from three months ago. Although this change is minor, it serves as a warning signal to investors. However, even at a 75% gross margin, Nvidia's performance still far exceeds the industry average, remaining one of the highest among companies in the PHLX Semiconductor Index.


The Double-Edged Sword of New Products

To maintain its competitive edge, Nvidia is developing increasingly complex new products. These new products require significant capital investment, as well as time and technical expertise. While these new products are expected to continue driving Nvidia's performance growth, they also bring certain risks, especially in terms of pressure on gross margins.


Resilience in Gaming Business

In addition to its data center business, Nvidia's gaming business also performed well. In the second quarter of 2025, gaming business revenue reached $2.88 billion, a 15.83% increase year-on-year. The release of new products and increased market demand drove this growth. Although the gaming business's share of Nvidia's overall revenue is gradually decreasing, it remains an important part of the company's income.


High Market Expectations

Although Nvidia's overall revenue and profit exceeded Wall Street's expectations, the margin was smaller than in the past year. Over the past year, Nvidia's performance repeatedly exceeded expectations by a large margin, raising investor expectations. This time, Nvidia forecasted its revenue for the current quarter (ending in October) to be $32.5 billion, 2% higher than Wall Street's expectations. However, in the same period last year, Nvidia's performance forecast exceeded analysts' expectations by 28%.

These high expectations put enormous pressure on Nvidia. Despite the company's excellent performance, investors always seem to expect more. This led to the stock price drop following the earnings report. For a company whose market value has increased more than fivefold in the past 18 months, this is just a slight correction but also reflects market concerns about its future performance.


The Future of the AI Market

Nvidia's future is closely tied to the prospects of the AI market. Microsoft, Amazon, Meta Platforms, and Google's parent company Alphabet reported in their recent earnings that their combined capital expenditures for the June quarter totaled $58.5 billion, a 64% increase year-on-year. These expenditures are primarily for AI infrastructure, which is good news for Nvidia as it holds a significant share of the AI chip market.

However, the sustainability of this spending remains in question. If the actual demand for generative AI services does not grow as rapidly as tech optimists currently expect, Nvidia's performance could be affected. CEO Jensen Huang expressed confidence during the earnings call, predicting that next year will be a good year. But for a $3 trillion company like Nvidia, even stellar performance sometimes might not be enough.


The Stock's Thrilling Roller Coaster

Despite Nvidia's consistently strong performance, its stock fell by 6.38% after the earnings report. This drop is mainly due to investors' high expectations for the company's future growth not being fully met. Nvidia's stock has already risen by over 150% this year, and since the beginning of 2023, it has surged by 750%. Such rapid growth has also made the market highly anticipative of its future performance.

Furthermore, Nvidia's stock decline also impacted other semiconductor companies worldwide, including big names like Samsung and Taiwan Semiconductor Manufacturing Co. This chain reaction highlights Nvidia's significant position in the semiconductor industry.


Future Challenges and Opportunities

Nvidia is developing the next-generation Blackwell AI chip, expected to generate several billion dollars in revenue in the fourth quarter. Although this plan has been slightly delayed, the company's management remains confident about the future. Nvidia's CFO Colette Kress stated during the earnings call, We expect to ship several billion dollars in Blackwell revenue in the fourth quarter.

Nvidia's future is still full of limitless possibilities. Let's wait and see how this tech giant continues to write its legendary story.


Disclaimer: the above is a summary showing certain market information. AInvest is not responsible for any data errors, omissions or other information that may be displayed incorrectly as the data is derived from a third party source. Communications displaying market prices, data and other information available in this post are meant for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of any security. Please do your own research when investing. All investments involve risk and the past performance of a security, or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not assure a profit, or protect against loss in a down market.