Nvidia’s Slowing Growth Sends Shockwaves Through Chip Market
Nvidia, the artificial intelligence (AI) chip giant, reported strong second quarter earnings, but a slight slowdown in growth sent shockwaves through the chip industry, impacting the shares of its suppliers and other tech companies across Asia.
Key Takeaways:
- Nvidia’s strong earnings: Despite beating revenue and earnings per share estimates, Nvidia shares fell on fears of slowing growth in the current quarter.
- Suppliers impacted: South Korean chipmakers SK Hynix and Samsung Electronics, which manufacture high-bandwidth memory (HBM) chips for Nvidia, saw their shares plummet.
- Broader tech slump: The broader tech sector in Asia also experienced declines, with Japanese and Chinese chipmakers also feeling the pressure.
- Growth concerns: Nvidia’s gross margin slipped, and its annual gross margin forecast fell below analyst expectations, suggesting a slowdown in its aggressive growth.
- Still bullish: Despite the recent dip, some analysts remain bullish on Nvidia, citing its dominance in the AI chip market.
Nvidia’s Slowdown Sparks Concerns
Nvidia’s strong second-quarter earnings were overshadowed by concerns about the company’s future growth. While the company exceeded analyst expectations, the market appeared to be anticipating even more aggressive gains.
"People [are] maybe thinking the runaway train is slowing down a little bit," Luke Rahbari, CEO of Equity Armor Investments, told CNBC’s "Squawk Box Asia" explaining the share decline.
However, Rahbari remains optimistic about Nvidia’s long-term prospects. "[N]o company in the world, in my estimation, has the position that Nvidia has in their industry, such a dominant position," he said.
Nvidia’s Supplier Chain Suffers
Nvidia’s slowdown in growth had a tangible impact on its suppliers. The shares of South Korean chipmakers SK Hynix and Samsung Electronics, both critical manufacturers of HBM chips for Nvidia, plummeted.
HBM chips play a key role in enabling the high-performance computing required for AI applications. Nvidia’s reliance on these specialist memory chips makes its suppliers particularly vulnerable to its financial performance.
The Broader Asian Tech Sector Feels the Heat
The spillover from Nvidia’s results extended beyond its immediate suppliers. The broader tech sector in Asia also experienced a sell-off, highlighting the interconnectedness of the global chip market.
Japanese semiconductor companies including Renesas, Advantest, and Tokyo Electron all saw their shares decline, albeit to a lesser extent than Nvidia’s suppliers.
Chinese chipmakers listed in Hong Kong, while less directly linked to Nvidia’s value chain, also suffered losses. SMIC, a partially state-owned company, lost about 1.4%, while Hua Hong Semiconductor fell by 1.66%.
Gross Margin Concerns
A key factor contributing to the market’s jitters was Nvidia’s declining gross margin. The company’s gross margin slipped to 75.1%, down from 78.4% in the previous quarter. Furthermore, its annual gross margin forecast of "mid-70% range" was below analysts’ estimates of 76.4%.
This decline in gross margin suggests that Nvidia may face increasing pressure on pricing or production costs, potentially limiting its future profitability.
Growth Slowdown, But Still a Dominant Player
Despite the recent share decline and concerns about future growth, some analysts still remain bullish on Nvidia. Mark Lushcini, chief investment strategist at financial advisory firm Janney Montgomery Scott, called the decline in Nvidia shares a "rounding error," highlighting Nvidia’s massive share appreciation this year.
Lushcini acknowledges the slowdown in growth but emphasizes Nvidia’s dominant position in the AI chip market. He warns, however, that "the pace of growth is slowing down for 4 quarters now. For a company that’s trading on a 40-50 times forward earnings, that’s a high demand hurdle to overcome vs expectations."
The Future of Nvidia
Nvidia continues to be a crucial player in the rapidly evolving AI landscape. However, the company’s recent earnings report has highlighted the challenges of maintaining explosive growth in a maturing market.
The coming quarters will be crucial for Nvidia as it navigates the delicate balance between continued growth and potential pressure on profitability. The company’s ability to navigate these challenges will have significant implications for its suppliers and the broader tech industry.
