Shares of the artificial intelligence chipmaker Nvidia Corp edged down 1% today after the company posted third-quarter results that crushed Wall Street’s expectations, as executives warned of a negative impact in the coming quarter from new export restrictions that will likely affect sales to customers in China.

In a letter to shareholders, Nvidia Chief Financial Officer Colette Kress said that “sales to these destinations will decline significantly in the fourth quarter of fiscal 2024, though we believe the decline will be more than offset by strong growth in other regions.”

Kress further elaborated on Nvidia’s response to the new restrictions on a conference call with analysts. She said the company is working with some important clients in China and the Middle East to obtain export licenses that would allow it to ship some of its high-performance products. The company is also working to develop new data center hardware that complies with the latest U.S. government policies and can be shipped to those regions without the need for a license, she said.

The update came after Nvidia delivered yet another blowout report on the back of incredible demand for AI hardware. The company reported earnings before certain costs such as stock compensation of $4.02, well ahead of Wall Street’s forecast of $3.37. Revenue for the period grew by an impressive 206% to $18.2 billion, well ahead of the analysts’ call for $16.18 billion in sales.

Nvidia also reported net income of $9.24 billion, up from just $680 million one year earlier.

Driving Nvidia’s growth is the all-important data center segment, which delivered revenue of $14.51 billion in the quarter, up 279% and beating the consensus estimate of $12.97 billion. Of that revenue, more than half of it came from cloud infrastructure providers such as Amazon Web Services Inc. and Google Cloud, with most of the rest coming from large enterprises.

Kress told analysts that the company saw significant uptake from cloud providers that enable their customers to rent access to graphics processing units, chiefly to power AI and other high-performance computing workloads.

Nvidia’s gaming segment, once its biggest business unit, added revenue of $2.86 billion, up 81% from a year earlier and above the consensus estimate of $2.68 billion. Just two years earlier, the gaming segment was the larger of Nvidia’s two main business segments. The unit sells GPUs for video gamers.

However, with the rise of generative AI models such as ChatGPT and the unprecedented demand from enterprises looking to take advantage of them, the company simply cannot keep up with its customer’s requests for more GPUs. The data center segment’s astonishing growth reflects that reality.

Holger Mueller of Constellation Research Inc. said Nvidia is a poster child for the demand and growth of AI. The company has delivered almost unheard-of expansion in its operating income, net income and diluted earnings-per-share, with all three growing by around 600% from a year earlier.

“Its revenue will end up being closer to $100 billion than $10 billion for the full year,” the analyst said. “What’s more, Nvidia has more than doubled its quarterly revenue, while costs are up just 15% in the same period. These are numbers that are unheard of for hardware vendors, and not even achievable by most software vendors.”

Mueller was equally impressed with Nvidia’s cloud growth, pointing out that not a single cloud vendor was using its chips just a few years ago. “Now they account for 50% of its data center revenue,” he said. “AI workloads also need fast networking, and Nvidia’s network business is benefiting too, currently on a $10 billion revenue run rate. The only concern is the export controls in China, but even that is unlikely to be a problem because the demand is such that Nvidia should easily find other buyers for its chips.”

The data center segment is likely to grow more, as Kress told analysts that Nvidia’s GPUs will soon be made available on Oracle Corp.’s cloud infrastructure too. The company is also working on improving its supply capacity, Kress said, so it can ship more chips to customers.

The company does face some challenges, with the export restrictions that may limit GPU sales in China and rising competition from companies such as Advanced Micro Devices Inc., which announced a rival AI accelerator chip earlier this year. Nevertheless, Wall Street investors have been swept away with optimism, and Nvidia’s stock hit a new all-time high in the run-up to today’s earnings call.

It’s difficult to avoid superlatives or find fault with Nvidia’s performance, said Charles King of Pund-IT Inc., pointing out that the company’s stock has risen by an impressive 400% since June 2022. However, he said there are two questions that investors may want to ask about the company.

“The first is whether Nvidia and its management can successfully pivot the company again if or when AI somehow loses its luster,” King said. “The second is how the company will fare if any of the alternatives to its popular GPUs take off. Still, the prospect of either scenario is unlikely to drown out the sound of popping champagne corks at Nvidia tonight.”

Indeed, if anything, Nvidia is looking more than likely to continue its charge. During the quarter it announced a steady stream of positive updates, launching a new HGX H200 computing platform that provides advanced memory to handle AI workloads, a sure sign that it’s doing everything it can to remain one step ahead of its competitors. The company also announced the next generation of its Ethernet networking technology, Spectrum-X, as well as a new generative AI foundry on Microsoft Corp.’s Azure cloud platform.

In its guidance, Nvidia said it’s looking at abut $20 billion in revenue, implying growth of 231%. It’s well above Wall Street’s forecast for fourth-quarter revenue of $16.38 billion.

Excluding today’s slight decline, Nvidia’s stock is up 241% in the year to date, well ahead of the broader S&P 500 Index’s 18% gain for the year.

Image: Nvidia