Nvidia’s recent third-quarter earnings report beat analysts’ expectations, showcasing impressive growth in both revenue and net income.
The company’s revenue surged by 94% year-over-year to $35.08 billion, while net income soared 109% to $19.3 billion. Despite these stellar numbers, Nvidia’s shares dropped by 2.5% in extended trading, prompting questions about whether the company’s own success is now becoming a double-edged sword.
Nvidia, a key player in the semiconductor industry, is riding high on the demand for its chips, particularly those used in artificial intelligence (AI) systems. Its data center segment, which accounts for the majority of its revenue, saw sales grow by 112%, driven by cloud companies investing heavily in infrastructure to support generative AI workloads. Despite these strong results, investors were quick to react to a slight slowdown in the pace of Nvidia’s growth compared to previous quarters. The company’s fourth-quarter revenue forecast suggests growth will slow to 69.5%, a significant drop from the 94% growth reported in Q3.
The slowdown in growth, even though still robust, highlights an emerging challenge for Nvidia: the high expectations that have built up around the company. Nvidia has become a Wall Street darling, largely due to its consistent ability to exceed analysts’ forecasts. This has set a very high bar, and even though the company continues to perform well, its growth rates may no longer be as astonishing as they once were. As Aswath Damodaran, a finance professor at New York University, noted, Nvidia is no longer just expected to meet analysts’ estimates but to exceed them by a substantial margin.
Adding to the complexity of Nvidia’s situation is the supply chain bottleneck limiting the production of its next-generation Blackwell AI chips. While demand for these chips remains strong, production constraints have slowed the ramp-up of sales, particularly for the high-margin products Nvidia is aiming to deliver in the coming quarters. These supply chain issues, partly stemming from limitations at Nvidia’s manufacturing partner, TSMC, have kept the company from fully capitalizing on its market dominance in AI processing.
While Nvidia’s outlook remains strong, with expectations to beat analysts’ fourth-quarter revenue predictions by $400 million, the company’s growth is increasingly tempered by its own success. Investors, who have grown accustomed to huge earnings beats, may be reacting to a more moderate growth outlook with some trepidation. This is indicative of what psychologists refer to as the “hedonic treadmill,” where once a certain level of success is reached, the expectation for even greater achievements increases, leading to a sense of dissatisfaction even when performance continues to improve.
