Nvidia gives lukewarm forecast, stoking fears of AI slowdown

Nvidia Corp., the world’s most valuable publicly traded company, gave a tepid revenue forecast for the current period, fueling concerns that a massive run-up in artificial intelligence spending is slowing. 

Though that was in line with the average Wall Street estimate, some analysts had projected more than $60 billion.

The forecast excluded data centre revenue from China, a market where it has struggled with US export restrictions and opposing pressure from Beijing.

The outlook adds to concern that pace of investment in artificial intelligence systems is unsustainable. The difficulties in China also have clouded Nvidia’s business.

Though the Trump administration recently eased curbs on exports of some AI chips to that country, the reprieve hasn’t yet translated into a rebound in revenue. 

Nvidia shares fell about 2% in extended trading following the announcement. They had rallied 35% this year through the close, lifting the company’s market capitalization above $4 trillion.

The company also approved an additional $60 billion in stock buybacks. Nvidia had $14.7 billion remaining under its previous repurchase plan at the end of the second quarter. 

Sales in that period, which ended July 27, rose 56% to $46.7 billion. That compared with an average estimate of $46.2 billion. Though the gain added more than $16 billion in quarterly revenue from a year earlier, it was the smallest percentage increase in more than two years. Profit was $1.05 a share, minus certain items. Wall Street was looking for $1.01.

The data center unit, a division that’s now larger by itself than any other chipmaker, had sales of $41.1 billion. That compares with an average estimate of $41.3 billion. Gaming-related revenue — once Nvidia’s main source of income — was $4.29 billion. Analysts projected $3.8 billion on average. The automotive segment generated $586 million in sales, a bit shy of estimates.

Nvidia is still dealing with the fallout from a growing US-China rivalry, where semiconductor technology has become a major flashpoint. In April, the Trump administration tightened restrictions on exports of data center processors to Chinese customers, effectively shutting Nvidia out of the market. Washington has subsequently rolled that back, saying that the US will allow some shipments in return for a 15% slice of the revenue. 

At the same time, Beijing has encouraged a move away from using US technology in AI systems accessed by the Chinese government. The shifting policies have made it difficult for Wall Street to predict how much revenue Nvidia might be able to recover in the market. Some analysts have made projections in the billions of dollars, while others have refused to predict any China sales until the company makes the situation clearer.

Nvidia said it didn’t record any sales of its H20 AI chip to China-based customers in the second quarter.

Heading into the earnings report, Nvidia analysts had a roughly $15 billion gap between their highest and lowest estimates for third-quarter revenue — one of the largest such ranges in the history of the company.

Under co-founder and Chief Executive Officer Jensen Huang, the 32-year-old chipmaker has suddenly become the biggest success story in the technology industry. Throughout most of its history, Nvidia lived in the shadow of larger rivals such as Intel Corp., carving out a modest living selling graphics processors to computer gamers.

Nvidia’s big breakthrough came when it adapted its graphics processing units, or GPUs, to run artificial intelligence software — creating something Huang calls accelerated computing.

As recently as 2022, Nvidia was a fraction of Intel’s size and booking less revenue in a year than it now pulls in a quarter. These days, Nvidia is on course for annual sales of $200 billion — with the number estimated to eclipse $300 billion by 2028. That would give the company about a third of the chip industry’s total revenue. 

But Nvidia is largely dependent on the spending plans of just a few companies. Microsoft Corp., Amazon.com Inc. and other giant data center operators account for about half of its sales. To diversify the business, Huang is pushing into new markets and providing a wider range of products. That includes offering complete computers, networking gear, software and services.

He’s determined to accelerate the adoption of AI across the economy, and he pushes his team to produce new hardware and software at a frenetic pace. 

For now, the Santa Clara, California-based company is largely unchallenged in the market for its AI chips, known as accelerators. In-house efforts by companies such as Amazon and early-stage challenges from would-be rivals such as Advanced Micro Devices Inc. haven’t yet made a significant dent in its market share.

But it faces other headaches. Aside from Nvidia’s struggles in China, the biggest impediment to growth has been the availability of supply. Like most chipmakers, Nvidia doesn’t own factories and relies on outsourced production, chiefly from Taiwan Semiconductor Manufacturing Co. Ramping up production of new technology remains an ongoing challenge.