Nvidia's Mixed Outlook as AI Spending Boom Continues

Nvidia, the dominant force in the AI chip market, reported mixed fourth-quarter results, underscoring the growing challenges in a rapidly evolving industry. While the company exceeded revenue expectations, its outlook for the current quarter and profit margins dampened investor enthusiasm, Bloomberg reported.

Despite posting strong fourth-quarter sales, Nvidia's stock dipped in after-hours trading on Wednesday. Investors reacted cautiously to the company's forecast for the fiscal first quarter, which ended in April, and its warning about tighter-than-expected gross profit margins.

Nvidia's chief executive officer, Jensen Huang, addressed concerns about slowing data center spending and the emergence of a low-cost AI model from Chinese startup DeepSeek, but the company's ability to consistently deliver blockbuster earnings has become more challenging.

"Guidance was slightly underwhelming," noted Logan Purk, an analyst at Edward Jones, in a report. However, Purk emphasized that the early success of Nvidia's new Blackwell chip should alleviate investor worries stemming from previous production delays.

Nvidia's fourth-quarter revenue reached $39.3 billion, aligning with analysts' predictions but representing the smallest margin of overperformance since February 2023. Earnings per share also showed a modest beat, marking the narrowest upside since November 2022.

The company's stock has already experienced a dip of 2.2% this year, following a period of remarkable growth in 2023 and 2024 that propelled Nvidia to become the world's most valuable chipmaker.

Nvidia has been a major beneficiary of the AI spending surge, doubling its revenue over the past two years. Major tech companies are pouring billions into data center hardware, and Nvidia holds a dominant position in the processors that power AI software development and deployment.

Despite the mixed outlook, Huang remains optimistic about the long-term prospects for AI, emphasizing that the technology is still in its early stages of adoption.

"We will grow strongly in 2025," Huang stated during a conference call with analysts.

Nvidia's data center unit, its largest source of revenue, generated $35.6 billion in sales, exceeding analysts' average estimate of $34.1 billion. However, gaming-related sales, once Nvidia's core business, fell short of expectations at $2.5 billion, compared to an average forecast of $3.02 billion.

The data center division's dominance is now such that it generates more revenue than Intel and Advanced Micro Devices combined.

Nvidia's success has been built on its graphics processors, which have also found applications in AI. Its chips are crucial for training AI models and for running the software in "inference," which powers services like ChatGPT.

Analysts had expressed concerns about near-term growth in Nvidia's data center business, citing supply constraints and the transition to the new Blackwell chip. The emergence of DeepSeek, which released a powerful AI model requiring significantly fewer resources to create, further fueled these concerns. The announcement in late January triggered a sell-off in AI-related stocks, including a record-breaking $589 billion drop in Nvidia's market cap in a single trading day.

However, key Nvidia customers, such as Microsoft, have maintained their capital expenditure plans, suggesting that the AI spending boom will continue.

During the conference call, Huang argued that DeepSeek will actually stimulate demand for Nvidia's products, as its model relies on "fine-tuning," requiring significantly more computing sessions than the "one-shot" training of other models. He estimated that this approach could require millions of times more computing power than current methods.

"Future reasoning models can consume much more compute," Huang stated, calling DeepSeek's model "an excellent innovation."

Despite the potential benefits of Blackwell, its rollout has come at a cost. The expenses associated with bringing the new technology to market have weighed on profit margins, according to Nvidia. Chief Financial Officer Colette Kress indicated that the company expects to improve its supply chain efficiency, leading to a return to a "mid-70s" percentage for gross margin by the end of the year.

For the current quarter, Nvidia forecasts a gross margin of about 71%, slightly below analysts' average estimates.

Nvidia has a history of exceeding analysts' expectations, making its current performance particularly noteworthy.

"We think it will be challenging for management to continue to significantly beat expectations for future growth," Purk concluded.