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on august 28, local time, the highly anticipated ai giant nvidia released its second-quarter financial report. although the financial report exceeded wall street expectations, and achieved four consecutive quarters of triple-digit revenue growth, sales exceeded $30 billion, and profits more than doubled, nvidia's stock price fell nearly 7% after the market that day, and its market value evaporated by $200 billion.

the positive news in the financial report is unlikely to drive the stock price up further, which also reflects investors' overly high expectations and their "stay away" from nvidia's overly high stock price.

asked if he felt the pressure of those expectations, nvidia founder and ceo jensen huang said: “we can only do our jobs. everyone is rushing toward the future, and it’s our responsibility to help the world realize that future.” he also stressed that accelerated computing has reached a tipping point and that investing in nvidia’s chips can yield “immediate returns.”

failure to meet investor expectations

since the end of 2022, nvidia's stock price has risen nearly 9 times, with a market value of over $3 trillion. this makes nvidia's importance in the u.s. stock market extraordinary. bespoke investment group wrote in a report on august 28: "nvidia's financial report has become the most important financial news event in the world."

so far this year, nvidia's stock price has soared by about 160%, and more than a quarter of the s&p 500's gains have been driven by nvidia's growth. however, since its stock price hit a record high in june this year, nvidia's market value has shrunk by nearly 30% in the past two months.

analysts believe that investors are now pricing nvidia in "perfection." bernstein analyst stacy rasgon wrote in a report that nvidia's performance guidance must significantly exceed analysts' expectations in order to see further growth in the stock price.

however, rasgon still recommends buying the chipmaker's shares. he believes that there is no sign that the market demand for nvidia's gpus is weakening. "gpus remain the core infrastructure for developing and running ai models," he said. "the market demand is still huge."

"the earnings report exceeded expectations, but people's expectations were too high," said jj kinahan, president of online trading platform tastytrade. "i don't know if they can give a good enough number to make these investors happy."

surging demand for artificial intelligence chips has helped nvidia corp. beat analysts’ consensus earnings estimates for several consecutive quarters, a trend that has led investors to expect the company’s profit margins to keep rising.

however, according to the financial report, nvidia's gross profit margin in the second quarter fell from 78.4% in the previous quarter to 75.1%, but it was still higher than 70.1% in the same period last year. the company expects that its gross profit margin for the whole year will remain around 70%, but it is lower than the 76.4% expected by analysts.

regarding the market's reaction to nvidia's financial report, deng zhijian, director of investment strategy for china at dbs bank, told the first financial reporter: "many investors believe that nvidia's stock price has already reflected the financial report in advance, so even if it is better than expected, it is still not good enough. moreover, compared with the previous quarter's 628% year-on-year profit growth, there has been a significant slowdown, so profit-taking is adopted."

he also mentioned that investors are concerned that nvidia's next-generation ai chip blackwell may be delayed, which will affect future profit growth. however, nvidia has said that blackwell will be shipped in the fourth quarter of this year and is expected to generate "billions of dollars" in revenue this year.

"i don't think nvidia's stock price has a significant premium, and the market demand for its chips has not decreased," deng zhijian told reporters. "competitors will not be able to provide alternatives with the same performance in the short term. so nvidia's competitive advantage is still obvious."

are the returns on ai investments sustainable?

another concern among investors is whether nvidia's big customers' investments in ai infrastructure are sustainable. in the earnings call, institutional analysts rushed to ask nvidia executives questions about whether their customers' investments were profitable.

in response, nvidia reiterated that investing in the company's ai chips can "get an immediate return." the company said that for every $1 invested in nvidia chips, cloud service providers can earn $5 within four years.

huang renxun emphasized on the earnings call that companies like meta are saving costs by using nvidia chips to build recommendation systems because generative ai can start doing more coding.

huang renxun said that investing in ai infrastructure is currently the infrastructure investment with the highest return on investment. one important background is that computing is shifting from general computing to accelerated computing. huang renxun emphasized that nvidia's chips not only provide support for ai chatbots, but also for advertising targeting systems, search engines, robots, and recommendation algorithms behind social media.

"it doesn't make sense to invest in more cpu infrastructure. the benefit of investing in ai chips is that you can save money on data processing, such as using algorithm recommendation systems," huang said. "and everything you build will be rented because many companies are creating generative artificial intelligence." huang said, your capacity will be rented immediately, and the return on investment is very good. "

he also said that any company wants to be the creator of the next frontier and eventually benefit from the next generation of advertising systems, recommendation systems, and search systems for its internet services, so generative artificial intelligence is also a quick return on investment. "building everything with accelerated computing methods is the best way," he said.

this round of us stock market gains is largely driven by the investment of technology giants in the field of ai. in an earlier earnings report, meta said that it expects full-year capital expenditures to be between $37 billion and $40 billion, an increase of $2 billion from the lower limit of the previous quarter's guidance. microsoft also said that it expects capital expenditures in fiscal 2025 to exceed $56 billion in 2024. google expects capital expenditures "to reach or exceed" $12 billion each quarter this year.

however, some market analysts said that one of the reasons for the increased volatility of nvidia's stock price is that a large part of the company's revenue depends on a small number of customers, mainly large cloud service providers. this year's earnings season has led investors to sell stocks of technology companies whose performance has failed to justify high valuations, and people's confidence in this wave of stock price increases driven by artificial intelligence has been shaken in recent weeks.

executives from google and meta have both recently admitted that they may have spent too much on ai infrastructure, and investors are concerned about whether the already huge spending of these major artificial intelligence players in the competition for dominance in the emerging ai technology field will increase. microsoft and google's stock prices have been falling since the release of earnings reports last month. but these tech giants also said: "the risk of underinvestment is too great, so they have to take active measures."

sheng linghai, an analyst at research firm gartner, told reporters that the market's expectations for demand for artificial intelligence chips may have been too high, and the actual demand may not be that great. "market expectations are always optimistic, but large demand cannot be sustained forever. there is also a certain gap between the huge investment in ai and the expected returns."

speaking about chip demand during the earnings call, huang renxun said that demand for nvidia's current generation of ai chip hopper "remains strong" and demand for the next generation blackwell will "far exceed supply." "we are seeing momentum in generative ai accelerating," huang said. the company expects its data center revenue to "grow significantly" next year.

but whether nvidia's confidence can continue to stimulate the capital market in the future will take time to answer.