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Nvidia earnings will be major test for AI demand, market rally

Nvidia earnings will be major test for AI demand, market rally

In recent developments, Nvidia investors are eagerly awaiting the company’s upcoming quarterly report, slated for release on Wednesday. With its shares having surged threefold this year alone, many are speculating whether the chip designer will surpass revenue estimates and, if so, by how much.

Nvidia’s meteoric rise in value has been significantly attributed to the proliferation of ChatGPT and other generative artificial intelligence applications, which are predominantly powered by the company’s graphics processors. This surge has not only led to a remarkable increase of over $700 billion in market valuation but has also propelled Nvidia to become the first trillion-dollar chip firm. The shares experienced an 8.5% surge on Monday, marking the most substantial increase in nearly three months.

However, this rapid escalation in Nvidia’s stock price leaves little room for any potential earnings-related disappointment. Analysts caution that anything short of a higher-than-anticipated forecast could trigger a significant downturn in the stock, potentially leading to a market-wide correction. This is particularly noteworthy since a substantial portion of the S&P 500’s gains this year have stemmed from the AI-driven rally in Nvidia and other Big Tech stocks.

The impact of Nvidia’s upcoming results goes beyond the company itself; it has the potential to steer the broader market direction for the week. Inge Heydorn, a partner at GP Bullhound, which holds Nvidia and AMD shares, expressed concerns about the dependency on Nvidia’s performance: “AI is really the last pillar of growth and everybody is depending on it. If Nvidia shows weakness, we could be in for quite a substantial correction in the market.”

Wall Street’s expectations for Nvidia’s third-quarter revenue guidance are around a staggering 110% increase to $12.50 billion, according to Refinitiv. It’s worth noting that Nvidia has deviated from revenue estimates only once in the past two years. Citi analysts initially projected a revenue forecast of approximately $12 billion, but recent market sentiment has elevated buy-side expectations to $14 billion.

With the bullish sentiment around Nvidia, more than 10 brokerages have raised their price targets for the stock. This has pushed the median price projection to $500, reflecting a 15.5% increase from its most recent closing price.

Although Nvidia’s 12-month forward price-to-earnings ratio had skyrocketed to over 80 after its second-quarter revenue forecast indicated growth of more than 50% in May, this ratio has since decreased as analysts adjust their earnings expectations. Currently trading at nearly 40 times the consensus earnings for the next 12 months, Nvidia’s valuation significantly surpasses that of its competitor AMD, which stands at 29 times.

A crucial factor for investors will be Nvidia’s data center unit, which houses its coveted H100 chip used in AI applications. Reports suggest that Nvidia can only meet half of the existing demand for this chip, resulting in its price doubling from the original $20,000. This trend is expected to persist for several quarters. However, concerns about growth arise from the fact that a portion of the heightened demand is originating from China, where companies are stockpiling chips due to apprehensions about potential U.S. export restrictions.

Nonetheless, Nvidia may face competition from AMD, which aims to challenge Nvidia’s supremacy in AI workloads with its M1300X chip. With the chips potentially being up to 50% cheaper than Nvidia’s GPUs, industry players like Meta or Google could seek to reduce costs. AMD plans to commence shipping the chip in the fourth quarter and could reportedly capture about 10% of the AI chip market next year. Despite this, analysts caution that AMD might struggle to catch up with Nvidia’s software CUDA, which already holds the industry standard in AI and enjoys a substantial head start.

Nvidia’s impending quarterly report carries immense significance not only for the company itself but also for the broader market. The stock’s remarkable rally, driven by the surge in AI applications, has elevated expectations, and any deviation from the anticipated revenue forecast could lead to substantial market repercussions. As the last bastion of growth, Nvidia’s performance is intertwined with market sentiment and could dictate the trajectory of the technology sector in the weeks to come.


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