Nvidia’s earnings will be a major test of AI demand, and market recovery

Aug. 21 (Reuters) – Investors in Nvidia (NVDA.O) expect the chip maker to expect higher-than-estimated quarterly revenue when it reports results on Wednesday. Their only question is, how far?

The company has been the biggest beneficiary of the rise of ChatGPT and other AI applications, nearly all of which are powered by its own graphics processors.

Nvidia’s stock value has tripled this year, adding more than $700 billion to the company’s market valuation and making it the first trillion-dollar chipset company. They were up more than 8% in afternoon trading Monday, making the stock post its biggest jump in nearly three months.

Some analysts have warned that the sharp rise in its shares means that Nvidia has little room for any earnings disappointment and anything other than higher than expected expectations could send its shares a rout.

The results could also set the tone for the broader market this week, as most of the S&P 500’s gains this year have come from an AI-driven rally in Nvidia and Big Tech stocks.

“I’ve covered technology since 1994 and I’ve never seen an environment where you rely so heavily on one company to deliver,” said Inge Heydorn, partner at GP Bullhound, who owns shares of Nvidia and AMD (AMD.O).

“Artificial intelligence is really the last pillar of growth and everyone is counting on it. If Nvidia shows weakness, we can make a big market correction.”

Wall Street expects the chip company to drive a nearly 110% increase in third-quarter revenue to $12.50 billion, according to Refinitiv. Nvidia has only projected revenue below estimates once in the past two years.

Citi analysts said last week they only modeled revenue projections of around $12 billion, but the buy-side forecast rose to $14 billion.

At least 10 brokerages raised their price targets on the stock last week, pushing the average bid to $500, which is 15.5% higher than its last close.

While the company’s forward 12-month price-to-earnings ratio rose dramatically to more than 80 after second-quarter revenue forecasts of more than 50% growth in May, it has since fallen as analysts raised their earnings forecasts.

It now trades at nearly 40 times consensus earnings for the next 12 months, well above 29 for AMD.

Investors will look at sales in Nvidia’s data center unit, home to the prized H100 chip used in artificial intelligence, to see if the valuation can be justified.

Divide supply and demand

Nvidia is able to meet only half of the demand and the H100 chip sells for twice its original price of $20,000, the analysts said, adding that the trend could continue for several quarters.

However, there are some concerns about growth as some of the increased demand is coming from China, where companies are stockpiling chips due to concerns about further US export restrictions.

“I don’t think the risk of losing business in China is included in the numbers, and that also disturbs the picture somewhat,” Heidorn said.

The supply-demand gap may also cause some buyers to turn to rival AMD, which is looking to challenge Nvidia’s strongest offering for AI workloads with its M1300X chip.

“AMD chips could be up to 50% cheaper than Nvidia GPUs and someone like Meta or Google might want to look at lowering their cost,” said Harsh Kumar of Piper Sandler.

Analysts expect AMD to start shipping the chip in the fourth quarter and could control nearly 10% of the AI ​​chip market next year.

But they cautioned that AMD will face an uphill battle catching up to Nvidia’s CUDA software, which is already the industry standard in AI and has a head start over the company’s similar offerings.

“Historically in the semiconductor business, the leader always has 70% or 80% of the market share, but customers always want to keep a second source, so the leader is not overcharged, and that second source here is AMD,” Kumar said. .

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