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Nvidia has projected its slowest revenue growth in seven quarters, falling short of some investors' high expectations for the world's most valuable artificial intelligence (AI) chipmaker.

The California-based company's shares dropped 5% after the announcement but quickly recovered to trade down 2.5% after hours. During the regular session, the stock closed 0.8% lower.

Investor expectations were high ahead of the results, with Nvidia shares climbing more than 20% over the past two months and reaching an intraday record high on Monday.

The stock has nearly quadrupled this year and increased more than ninefold over the last two years, giving it a market value of $3.6 trillion.

Nvidia is currently launching its powerful Blackwell family of AI chips, which will initially impact the company's gross margins but are expected to improve over time.

The new processors have been well-received by Nvidia's customers, and the company anticipates exceeding its initial sales projections of several billion dollars for the fourth quarter, according to Chief Financial Officer Colette Kress.

Addressing media reports of overheating issues in a flagship liquid-cooled server containing 72 of the new chips, CEO Jensen Huang assured that there are no such issues.

Customers like Microsoft, Oracle, and CoreWeave are implementing these systems. "There are no issues with our Grace Blackwell liquid-cooled systems," Huang told Reuters. "The engineering is not easy at all because what we're doing is hard, but we're in good shape."

Initially, the Blackwell chips will carry gross margins in the low 70% range, but these are expected to rise to the mid-70% range as production increases, Kress stated.

The company forecast revenue of $37.5 billion, plus or minus 2% for the fourth quarter, compared to analysts' average estimate of $37.09 billion according to data compiled by LSEG.

Despite an impressive growth rate driven by high demand for the company's chips powering complex generative AI systems, this forecast marks a clear slowdown from previous quarters when Nvidia's sales mostly doubled.

Nvidia's fourth-quarter forecast suggests revenue growth will slow to roughly 69.5% from 94% in the third quarter.

"Investors have become accustomed to huge beats from this company, but doing that is getting harder and harder," said Ryan Detrick, chief market strategist at Carson Group. "This was still a very solid report, but the truth is when the bar is this high, it makes things just that much tougher."

Despite the slowdown in revenue growth, demand for Nvidia's AI chips remains strong. Supply chain challenges have made it harder for Nvidia to achieve the substantial revenue beats that have made it a favorite on Wall Street.

However, growth could rebound if the company's margins exceed 75%, said IDC analyst Brandon Hoff.

One bottleneck for its chip supply has been the limited capacity for advanced manufacturing techniques at its fabrication partner, TSMC.

Huang declined to comment on specific production issues with TSMC but told Reuters, "As we ramp [Blackwell] up, we'll keep increasing more production lines, improving our yield, and cycle time. All of that would improve our outputs."

Yield refers to the number of working chips per wafer. Nvidia reported fixing a design flaw with its Blackwell chips by changing the blueprints used by TSMC for manufacturing.

Nvidia recorded third-quarter adjusted earnings of 81 cents per share, compared with estimates of 75 cents per share.

Sales in the data center segment, which accounts for a majority of Nvidia's revenue, grew 112% to $30.77 billion in the quarter ended Oct. 27. The segment had previously recorded growth of 154% in the prior quarter.

Nvidia's sales are bolstered by continued cloud company spending on its chips to expand data centers capable of handling generative AI's complex processing needs. The company reported that its adjusted gross margin shrank to 75%.

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