Nvidia Delivers Q3 FY2025 Earnings Beat: But Why Is The Stock Falling?

TradingKey - It was the moment that the stock market had been waiting for; Nvidia Corp’s (NASDAQ: NVDA) latest earnings. The Artificial Intelligence (AI) semiconductor behemoth reported its latest Q3 FY2025 results (for the three months ending 27 October) on Wednesday after the market closed in the US.

Nvidia shares have surged this year, following a monster 2023, and coming into the earnings release were up nearly 25% since the company last reported a set of quarterly numbers (in late August).

The company’s latest Q3 FY2025 earnings exceeded the consensus expectations but, following the release, Nvidia’s stock price fell as much as 3.5% in after-hours trading. So, what should investors know about the latest “AI-centric” numbers from Nvidia and why exactly did its shares decline after? 

Blackwell chip production to hit margins

On the top line, it looks good for Nvidia once more as the company posted revenue of US$35.1 billion in Q3 FY2025, up 94% year-on-year. That also came in ahead of the average consensus expectation for sales of just over US$33.1 billion.

In terms of guidance, Nvidia says it expects to put up revenue of US$37.5 billion in the current quarter (Q4 FY2025) – something that may have disappointed investors somewhat as the average analyst estimate was US$37.1 billion but there were some projecting revenue as high as US$41 billion.

The big story for investors during the quarter, though, was the scaling up of Nvidia’s latest next-gen AI chip named Blackwell. Constraints on the manufacturing side have limited the output of the chip by Nvidia and the company again reiterated that this was an issue but it’s also a good sign that demand is exceeding supply at this point.

In terms of the negative share price reaction, a part of that could be attributed to the fact that the scaling up of Blackwell will hit Nvidia’s gross margin (which is in the enviably-high mid-70% range). Gross margin measures the percentage of revenue that’s retained after direct expenses associated with producing its products – like labour and materials – have been subtracted.

Nvidia CEO Jensen Huang told analysts on the earnings call that Blackwell is now in full production and it’s now “in the hands of all of our major partners”, which include the likes of Microsoft Corp (NASDAQ: MSFT) and Amazon.com Inc (NASDAQ: AMZN).

While that’s positive, the switch to the Blackwell chip does mean that gross margin will be negatively impacted – to the tune of 2 percentage points (from 75% in the reported quarter to 73% in the current quarter). However, that gross margin is expected to rebound as the new products reach higher-scale production.

High expectations and concentrated customers

While it was a still-impressive earnings report from the AI chip giant, the main issue for Nvidia’s share price was that it’s had an incredible run so far in 2024. Up over 200% year-to-date heading into earnings, expectations were sky-high and it appeared that only a blowout earnings report (which this wasn’t) would be able to send Nvidia shares higher. 

In comparison, semiconductor rivals in the AI space Advanced Micro Devices Inc (NASDAQ: AMD) – also known as AMD – and Intel Corp (NASDAQ: INTC) are down 0.7% and 50% respectively so far in 2024.

While there are no broader concerns about AI demand and Nvidia’s ongoing dominance of the chip + software side of the equation, there are some lingering worries about how much concentration Nvidia has in its client base.

The traditional “Big Tech” clients that it serves, that include a small number of large firms like Microsoft, Amazon, and Meta Platforms Inc (NASDAQ: META), now make up 50% of the data centre revenue for Nvidia. That was up from 45% in the prior quarter. 

Despite all this, it was another solid quarter from Nvidia and the demand seen for its chips continues to be strong. If the company can successfully scale up production of its Blackwell chip and fully meet demand, then the company could be on course to deliver even more turbocharged profits in 2025.