Nvidia's earnings report highlights the issue of being overpriced for excellence.

• On Wednesday, Nvidia reported better-than-expected results and issued optimistic revenue guidance, but their gross margin slightly decreased.
• The stock, which had increased almost nine times since the end of 2022, experienced a decline in extended trading.
• The revenue growth exceeded expectations, increasing by 122% compared to the previous year.

On Wednesday, the company reported its fourth consecutive quarter of triple-digit revenue growth, surpassing estimates on both the top and bottom lines. Additionally, the company announced a forecast that exceeded Wall Street expectations and increased its buyback program by $50 billion in shares.

But the stock dropped 7% in extended trading.

Nvidia has experienced tremendous growth in its market value, reaching a $3 trillion valuation and surpassing every public company other than Apple. Its growth can be attributed to the artificial intelligence boom, with its stock price increasing almost nine-fold since the end of 2022.

Nvidia announced on Wednesday that it expects to report 122% annual revenue growth to over $30 billion. Additionally, the company stated that sales in the current period will increase approximately 80% to around $32.5 billion, which is higher than the analysts' expectations of $32 billion.

According to Stacy Rasgon, an analyst at Bernstein, before the report was released, "buyside whispers" were closer to $33 billion to $34 billion, meaning Nvidia would need to significantly exceed analyst expectations in its guidance to experience a price increase.

Nvidia's GPUs, which are essential for developing and running AI models, have no signs of decreasing demand, according to Rasgon, who advises purchasing shares of the chipmaker.

"Rasgon stated on "Closing Bell" that there is still a significant demand and they continue to ship whatever they can sell."

Nvidia anticipates generating "several billion dollars" in revenue from its latest technology, Blackwell, in the upcoming fiscal third quarter, which concludes in October. Despite earlier concerns about potential delays, CFO Colette Kress stated during a call with analysts that supply and availability have improved.

Kress stated that the demand for Blackwell platforms exceeds the supply, and this trend is expected to persist into the next year.

Some investors may be focusing on Nvidia's gross margin, which decreased slightly in the quarter to 75.1% from 78.4% in the previous period. Despite this, the company's gross margin has increased from 43.5% two years ago and 70.1% in the fiscal second quarter of the previous year.

According to StreetAccount, analysts were anticipating a full-year gross margin of 76.4%, while the company forecasted its gross margin to be within the "mid-70% range" for the entire year.

'Getting returns right away'

During the earnings call, analysts queried Nvidia executives about customers and their profitability from investing in Nvidia. In response to the company's previous report, Kress presented investors with figures indicating that a cloud provider could generate $5 in revenue over a four-year period by selling access to $1 worth of Nvidia chips.

Nvidia CEO Jensen Huang announced on Wednesday that Nvidia's technology will be replacing traditional processors, such as those made by Intel or AMD, in certain applications. He also stated that generative AI will increasingly be used for coding, and that companies like Meta can use Nvidia chips for recommender systems. Additionally, Huang revealed that nations are beginning to purchase more chips from Nvidia.

Huang stated that those investing in Nvidia infrastructure are immediately seeing returns.

Huang concurred with Schmidt's statement that future AI models will need "10, 20, 40 times" more computational power.

Huang stated that the frontier models are expanding in a significant manner.

Nvidia's main customers are competing to be the first to develop new AI innovations, according to him.

"Huang stated that the individual who reaches the next plateau first will have the opportunity to present a groundbreaking level of AI, while the second person to arrive will be slightly improved or roughly equivalent."

Investing in Nvidia at these prices involves taking a risk that the company will continue to exceed expectations and accepting the high level of stock fluctuations typically associated with smaller companies.

Nvidia experienced a significant decline in market value after reaching a record in June, losing approximately 30% of its value over the next seven weeks, resulting in a market cap loss of roughly $800 billion. However, the company has since recovered most of those losses.

Over the past two years, the stock has experienced a single-day increase of 5% or more on 50 separate occasions. This has happened only six times for , which is one more than for . At , it has occurred 21 times. Fans of the electric automaker can relate as shares of the company have moved at least 5% on more than 70 trading days over that period.

Nvidia's increased volatility is due to its dependence on a limited number of customers, including those mentioned, for a significant portion of its revenue. Recently, top executives at Nvidia and Meta have acknowledged that they may be overspending in their AI development, but they believe the risk of underinvesting is too high to be cautious.

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