Investing

Market's hottest stock Nvidia plunges after traders didn't get perfect earnings report they expected

Key Points
  • Wall Street is surprised over Nvidia's slowing growth in its unit that serves artificial intelligence applications.
  • The company's shares were up 176 percent in the past 12 months through Thursday.
  • That performance ranks No. 1 in the entire S&P 500, way ahead of Micron's 90.5 percent, according to FactSet.
Market's hottest stock Nvidia plunges after traders didn't get perfect earnings report they expected
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Market's hottest stock Nvidia plunges after traders didn't get perfect earnings report they expected

When a company is by far the best performing stock in the entire market, it needs to report perfect results to drive its shares higher.

Nvidia did not do that Thursday, when it posted lackluster sales in a key growth market, a unit that serves artificial intelligence applications.

The chipmaker reported better-than-expected fiscal second-quarter earnings and guidance, but its data center segment sales, where its cards are used for machine learning and artificial intelligence applications, came in at $416 million versus the $423 million Wall Street consensus FactSet estimate.

Its shares opened down 5 percent on Friday, after falling as much as 7 percent in after-hours trading following the report.

"Our sense is that investors are disappointed in the datacenter quarter-over-quarter deceleration and view crypto upside as low quality," Jefferies analyst Mark Lipacis wrote in a note to clients Friday. "What we believe is not well understood is that in contrast to new gaming GPUs, which users buy and use instantaneously, new datacenter GPUs need to be tested and qualified before being scaled into datacenter-applications."

Lipacis reiterated his buy rating and his $180 price target for Nvidia shares, representing 9 percent upside to Thursday's close.

The data center market was a big focus on the Wall Street earnings call with Nvidia management Thursday.

An analyst started the question and answer session by asking why the data center sales growth slowed to 2 percent quarter over quarter from the 38 percent rate in the fiscal first quarter.

"We have seen several quarters where your data center business grew very strongly on a sequential basis. This time the growth was somewhat more modest," Bank of America Merrill Lynch analyst Vivek Arya said on the call.

CEO Jensen Huang said new products were a factor in the data center's slower growth.

"Q2 was a transition quarter for our data center. I thought we did great," Huang said, according to a FactSet transcript. "And so Volta was such a giant leap when we announced it ... right at the beginning of the quarter. I thought the team did fantastically transitioning the customer base to Volta, and now Volta is in high-volume production."

Nvidia launched new data center graphics cards named Volta in May.

Wall Street is not giving up on Nvidia.

"While the bears are likely to point to the deceleration in datacenter in FY2Q … we remain bullish on NVDA's medium- to long-term opportunity in the business as the company's GPU franchise continues to benefit from the proliferation of artificial intelligence/machine learning," Goldman Sachs analyst Toshiya Hari wrote Friday.

Hari reiterated his buy rating and $193 price target for Nvidia shares.

"Overall, we think expectations were simply too high into the print and the secular story remains unchanged," RBC Capital Markets' Mitch Steves wrote Thursday.

The analyst reaffirmed his outperform rating and $175 price target for the chip company.

Nvidia's stock is up 176 percent in the past 12 months through Thursday compared with the S&P 500's 11.6 percent return. That performance ranks No. 1 in the entire S&P 500 way ahead of Micron's second-place return of 90.5 percent, according to FactSet.

The company declined to comment on Friday's Wall Street analyst research.

— CNBC's Michael Bloom contributed to this story.

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