NVIDIA's Growth Slowdown Raises Concerns Among Investors

NVIDIA, the leading semiconductor company known for its innovative graphics processing units (GPUs), has recently reported earnings that have left Wall Street somewhat unsatisfied. The company's impressive growth metrics, which have previously wowed the market, seem to be losing their luster as investors grapple with the implications of a slowdown in the company's expansion.

Cautious Optimism in the Face of Decelerating Growth

A Slower Pace of Revenue Growth

NVIDIA's latest earnings report, released on Wednesday, showcased the company's continued success, with earnings and revenue growing more than 100% from the prior year. However, this also marked the company's slowest year-over-year revenue growth, at 122%, in a year. The rate of growth compared to the prior year was less than half of what NVIDIA reported in the first two calendar quarters of 2024, raising concerns among investors.

Shares Dip Amid Growth Deceleration

Shares of NVIDIA were down as much as 3.5% early Thursday morning, reflecting the market's unease with the company's slowing growth rate. This deceleration in growth is the chief concern for D.A. Davidson managing director Gil Luria, who maintains a Neutral rating on the AI juggernaut.

Concerns About Future Revenue Declines

Luria anticipates that NVIDIA's growth will decelerate further next year, and he even warns of the possibility of revenue declines. He argues that the current consensus estimates for NVIDIA's growth are excessively high and not easily justifiable, given the company's reliance on the margins of other large tech companies.

Potential Headwinds from Big Tech Spending Slowdown

Luria believes that the big tech hyperscalers, such as Microsoft, Amazon, Alphabet, and Meta, are likely to slow their spending at some point. Since these companies represent a significant portion of NVIDIA's current AI chip sales, a slowdown in their spending could pose a headwind to NVIDIA's future revenue growth.

Upbeat Tone from NVIDIA's Earnings Call

Despite the concerns, NVIDIA's earnings call struck an upbeat tone. CEO Jensen Huang described the demand for the company's new Blackwell chip as "incredible," and many Wall Street analysts remained bullish on the stock, with fears about delays on the Blackwell chip somewhat eased during the earnings call.

Investors Grapple with Valuation Concerns

For investors who have witnessed NVIDIA's stock rally more than 1000% since the start of the current bull market in October 2022, the slowing growth appears to be a sticking point. Jefferies analyst Blayne Curtis noted that NVIDIA's guidance for current quarter revenue of .5 billion, plus or minus 2%, was "good but not good enough" for a stock with such a lofty valuation.

Narrowing Earnings Surprises

NVIDIA's latest earnings results also failed to surprise Wall Street at the same pace as they had been accustomed to. The company's roughly 5% beat on earnings per share was the narrowest surprise since before the AI revolution kicked off in 2023, indicating that the market's expectations may have been set too high.

A Great Company, but the Bar Might Have Been Set Too High

As Carson Group chief markets strategist Ryan Detrick observed, "This is a great company that is still growing revenue at 122%, but it appears the bar was just set a tad too high this earnings season." The market's appetite for NVIDIA's continued growth may have outpaced the company's ability to meet those lofty expectations, leading to the current sentiment shift.