Nvidia (NVDA.O) investors expect the chip designer to forecast quarterly revenue above estimates when it reports results on Wednesday. Their only question is, by how much?
The company has benefited the most from the rise of ChatGPT and other generative artificial intelligence applications, almost all of which use its graphics processors.
This year, Nvidia’s stock has nearly tripled in value, adding more than $700 billion to its market capitalization and making it the first trillion-dollar chip company. In premarket trading on Monday, they were up more than 2%.
Some analysts have cautioned that Nvidia has little room for any earnings-related disappointments, and that anything other than a better-than-expected forecast could trigger a stock sell-off.
The results could also influence the broader market’s direction this week, as the AI-driven rally in Nvidia and Big Tech stocks has accounted for most of the S&P 500’s gains this year.
“I’ve been covering tech since 1994 and I have never seen an environment where you are so dependent on one company to deliver,” said Inge Heydorn, partner at GP Bullhound, which owns both Nvidia and AMD (AMD.O) shares.
“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.”
According to Refinitiv, Wall Street expects the chipmaker to guide for a 110% increase in third-quarter revenue to $12.50 billion. Nvidia has only forecast revenue below estimates once in the past two years.
Citi analysts stated last week that they were only modeling a $12 billion revenue forecast, but buy-side expectations have increased to $14 billion.
Last week, at least ten brokerages raised their price targets on the stock, pushing the median price target to $500, or 15.5% above its previous close.
While the company’s 12-month forward price-to-earnings ratio soared to more than 80 in May after forecasting over 50% revenue growth for the second quarter, it has decreased since then as analysts have increased their earnings expectations.
It is currently trading at nearly 40 times the consensus earnings estimate for the next 12 months, significantly higher than AMD’s 29.
Investors will be looking at sales at Nvidia’s data center unit, which houses the company’s prized H100 AI chip, to see if the valuation is justified.
Market Dynamics: Unveiling the Divide of Supply and Demand
According to analysts, Nvidia can only meet half of the demand, and its H100 chip is selling for double its original price of $20,000, a trend that could continue for several quarters.
Still, there are some concerns about growth because some of the demand surge is coming from China, where companies are stockpiling chips in anticipation of more U.S. export restrictions.
“I don’t think the risk of losing China business is incorporated in numbers and this is also somewhat disturbing the picture,” Heydorn said.
The supply-demand divide could also lead some buyers to turn to rival AMD, which is looking to challenge Nvidia’s most powerful offering for AI workloads with its M1300X chip.
“AMD’s chips could be as much as 50% cheaper than Nvidia GPUs and somebody like Meta or Google may want to look at lowering their cost,” Piper Sandler’s Harsh Kumar said .
According to analysts, AMD expects to begin shipping the chip in the fourth quarter and could control roughly 10% of the AI chip market next year.
However, they warned AMD that catching up with Nvidia’s software CUDA, which is already the industry standard in AI and has a significant lead over the company’s similar offering, will be difficult.
“Historically in semiconductors, the leader always has 70% or 80% share of the market but the customers always want to keep a second source around, so that the leader doesn’t overcharge, and that second source here is AMD,” Kumar said.