Nvidia, the dominant force in AI chip technology, experienced a dramatic 8.5% drop in its stock price on February 27, following its quarterly earnings report. The decline was driven by investor concerns over a significant reduction in profit margins for the upcoming quarters, despite the company’s robust financial performance in the last quarter.
On the New York Stock Exchange, Nvidia's shares closed at $120.15, a steep decline from the previous day, marking the lowest closing price since February 4. The company's market capitalization also took a hit, falling below the $3 trillion mark to settle at $2.942 trillion.
The recent earnings report revealed that Nvidia's revenue and earnings per share for the November 2024 to January 2025 period surpassed market expectations. For the current quarter, Nvidia projects its revenue to exceed $40 billion, a 3% increase over Wall Street analysts' average forecasts. Notably, the company reported a 93% year-over-year increase in data center AI chip sales, underscoring the sustained demand for AI technology.
Despite these impressive figures, the market's attention shifted to Nvidia's profit margins. The company expects a gross margin of 70.6% for the February to April period, a significant drop from the 75% margin achieved in the previous fiscal year. Nvidia's Chief Financial Officer, Colette Kress, mentioned during a conference call that gross margins could improve to the mid-70% range in the second half of the year as the supply of Blackwell chips increases.
Analysts have expressed concerns over Nvidia's future earnings. Scott Welch, an analyst at investment firm Sirtuity, noted, "Nvidia's earnings were good, but they were not the blockbuster results we had seen before." Kinngai Chan, an analyst at Summit Insights, downgraded Nvidia shares to a 'hold' rating. Chan explained that while Nvidia will benefit from ongoing data center capital expenditures, the reduced computing power requirements for inference may negatively impact the company in the medium to long term. He also warned of a potential slowdown in growth from the second half of this year as Nvidia's GPU supply catches up with demand.
Nvidia's sharp decline had a ripple effect across the semiconductor industry, leading to significant drops in other major semiconductor stocks, including Broadcom, Taiwan Semiconductor Manufacturing Co. (TSMC), Qualcomm, and AMD. The Philadelphia Semiconductor Index, which includes semiconductor-related stocks, closed down 6.09%.
Despite the challenges, Nvidia CEO Jensen Huang remains optimistic about the company's prospects. He highlighted the strong demand for the Blackwell chip and noted that Nvidia's position in the market is reinforced by emerging opportunities, such as the potential benefits from Chinese AI startup DeepSeek. Huang's statements appear to have temporarily alleviated concerns about competition from cost-effective models emerging in the market.
As Nvidia navigates the complexities of fluctuating profit margins and market dynamics, investors will be closely watching how the company adjusts its strategies to maintain its leadership in the AI chip sector while addressing the evolving demands of the industry.
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