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Nvidia Was a Bit Too Amped Up

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Nvidia CEO Jensen Huang delivered a keynote address at CES in Las Vegas in January 2018.

Nvidia CEO Jensen Huang delivered a keynote address at CES in Las Vegas in January 2018.

Photo: rick wilking/Reuters

Sometimes playing even a perfect game isn’t enough.

Nvidia
reported strong fiscal third-quarter results Thursday afternoon, managing to beat some already aggressive targets laid out by Wall Street. Revenue set new records at both the company’s key videogaming and data center segments, with sales for the latter exploding 162% year-over-year to hit $1.9 billion. Gaming revenue jumped 37%, exceeding $2 billion for the first time on a quarterly basis, thanks to strong demand for the company’s latest processors—and that was with supply shortages that the company said Thursday would take a few more months to clear.

The stock, however, slipped about 2% in after-hours trading. Nvidia projected overall revenue growth of 55% year-over-year for the fiscal fourth quarter ending in January—well above the 41% expected by analysts. But the quarter includes an extra week that might not have been fully factored into Wall Street’s targets, and Nvidia did note that it expects a sequential decline in its data center segment for the quarter. Analysts had been expecting a small sequential rise for that segment.

Mostly, though, Nvidia’s problem is that investors have run its stock up so much. Even great numbers weren’t enough. Nvidia’s share price is up more than 128% for the year—the biggest gainer by far on the PHLX Semiconductor Index. It also has been trading at a record-high valuation of more than 50 times forward earnings, more than twice its peer group’s average.

So a breather seems due, even with a strong gaming cycle still ahead. The company’s new Ampere gaming chips are flying off the shelves, with Chief Financial Officer Collette Kress saying on the company’s conference call that several key retail partners “sold out instantly.” Nvidia’s gaming business also should be helped by strong holiday demand for the Nintendo Switch console, which uses its processors. Finally, the company said sales of its core data center processors also will grow in the quarter, explaining that the projected sequential decline was more due to the recently acquired Mellanox business.

Nvidia, in other words, is still flying high. The stock had just already reached thin air.

Write to Dan Gallagher at dan.gallagher@wsj.com