Chipmaker Nvidia has become huge at astonishing speed. In that sense, it’s a bit like Tesla. Both have built up a huge lead in an industry undergoing dramatic transformation. And both are grappling with production setbacks and uncertainty about how big their markets can become. The bigger Nvidia gets, the more at stake.
Nvidia posted a 122% increase in revenue in the last quarter. Its results beat almost all expectations. The reaction: The stock opened 3% lower on Thursday. This is explained by some disappointments: its adjusted gross profit margin fell slightly to a still generous 76%, for example, the first sequential decline that CEO Jensen Huang has served in about two years. They have also lowered their forecasts.
Nvidia isn’t valued perfectly like Tesla. Musk’s company rocketed to $1 trillion on the back of its technology and profitability. Yet at its peak, the stock was trading at 156 times expected earnings. Nvidia is trading at 38 times, roughly where it was the day before Chat GPT debuted.
Tesla has already come down from the stratosphere a bit. What started as production problems snowballed, prompting Musk to scrap his targets. Tesla’s core gross margin, which excludes government loans for electric cars, has been cut in half since 2022. Nvidia’s manufacturing problems are minor: Its next generation of chips are undergoing production adjustments, though Huang has promised a rapid rollout. That’s small talk in an industry known for far worse problems.
It’s easy to understand the nervousness when Nvidia is pushing against the limits of the market, constrained by factors only partly under its control. Musk has one advantage: Investors give him leeway to promise that he will master everything from giant batteries to humanoid robots, granting him credit ahead of time, regardless of setbacks. Nvidia, for its part, is valued more for its extraordinary achievements in its core chip business and associated software. Huang is not promising to colonize Mars alone. His valuation could more easily be brought to Earth.
The authors are columnists for Reuters Breakingviews. The opinions are their own. Translation by Pierre Lomba Leblanc is the responsibility of CincoDías.
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