Nvidia is world’s ‘most vital stock,’ adds pressure to Q2 earnings

For Nvidia investors, the past two years have been a joyride. But recently they have been on more of a roller coaster.

As the first beneficiary of the factitious intelligence boom, Nvidia has seen its market cap expand by about ninefold because the end of 2022. But after reaching a record in June and briefly becoming the world’s Most worthy public company, Nvidia proceeded to lose almost 30% of its value over the following seven weeks, shedding roughly $800 billion in market cap.

Now, it’s within the midst of a rally that is pushed the stock inside about 7% of its all-time high.

With the chipmaker set to report quarterly results Wednesday, the stock’s volatility is top of mind for Wall Street. Any indication that AI demand is waning or that a number one cloud customer is modestly tightening its belt potentially translates into significant revenue slippage.

“It’s crucial stock on the planet right away,” EMJ Capital’s Eric Jackson told CNBC’s “Closing Bell” last week. “In the event that they lay an egg, it could be a serious problem for the entire market. I feel they will surprise to the upside.”

Nvidia’s report comes weeks after its megacap tech peers got through earnings. The corporate’s name was sprinkled throughout those analyst calls, as Microsoft, Alphabet, Meta, Amazon and Tesla all spend heavily on Nvidia’s graphics processing units (GPUs) to coach AI models and run massive workloads.

In Nvidia’s past three quarters, revenue has greater than tripled on an annual basis, with the overwhelming majority of growth coming from the information center business.

Analysts expect a fourth straight quarter of triple-digit growth, but at a reduced pace of 112% to $28.7 billion, in line with LSEG. From here, year-over-year comparisons get much tougher, and growth is predicted to slow in each of the following six quarters.

Investors shall be paying particularly close attention to Nvidia’s forecast for the October quarter. The corporate is predicted to point out growth of about 75% to $31.7 billion. Optimistic guidance will suggest that Nvidia’s deep-pocketed clients are signaling an ongoing willingness to open their wallets for the AI build-out, while a disappointing forecast could raise concern that infrastructure spending has gotten frothy.

“Given the steep increase in hyperscale capex over the past 18 months and the strong near-term outlook, investors ceaselessly query the sustainability of the present capex trajectory,” analysts at Goldman Sachs, who recommend buying the stock, wrote in a note last month.

Much of the optimism heading into the report — the stock is up 8% in August — is on account of comments from top customers about how much they’re continuing to shell out for data centers and Nvidia-based infrastructure.

Last month, the CEOs of Google and Meta enthusiastically endorsed the pace of their build-outs and said underinvesting was a greater risk than overspending. Former Google CEO Eric Schmidt recently told students at Stanford, in a video that was later removed, that he was hearing from top tech corporations “they need $20 billion, $50 billion, $100 billion” price of processors.

But while Nvidia’s profit margin has been expanding of late, the corporate still faces questions on the long-term return on investment that clients will see from their purchases of devices that cost tens of 1000’s of dollars each and are being ordered in bulk.

During Nvidia’s last earnings call in May, CFO Colette Kress provided data points suggesting that cloud providers, which account for greater than 40% of Nvidia’s revenue, would generate $5 in revenue for each $1 spent on Nvidia chips over 4 years.

More such stats are likely on the way in which. Last month, Goldman analysts wrote, following a gathering with Kress, that the corporate would share further ROI metrics this quarter “to instill confidence in investors.”

The opposite major query facing Nvidia is the timeline for its next-generation AI chips, dubbed Blackwell. The Information reported earlier this month that the corporate is facing production issues, which can likely push big shipments back into the primary quarter of 2025. Nvidia said on the time that production was heading in the right direction to ramp within the second half of the yr.

The report got here after Nvidia CEO Jensen Huang surprised investors and analysts in May by saying the corporate will see “rather a lot” of Blackwell revenue this fiscal yr.

While Nvidia’s current generation of chips, called Hopper, remain the premium option for deploying AI applications like ChatGPT, competition is popping up from Advanced Micro Devices, Google and a smattering of startups, which is pressuring Nvidia to keep up its performance lead through a smooth upgrade cycle.

Even with a possible Blackwell delay, that revenue could just get pushed back right into a future quarter while boosting current Hopper sales, especially the newer H200 chip. The primary Hopper chips were in full production in September 2022.

“That shift in timing doesn’t matter very much, as supply and customer demand has rapidly pivoted to H200,” Morgan Stanley analysts wrote in a note this week.

Lots of Nvidia’s leading customers say they need the extra processing power of Blackwell chips with a view to train more advanced next-generation AI models. But they’ll take what they’ll get.

“We expect Nvidia to deemphasize its Blackwell B100/B200 GPU allocation in favor of ramping up its Hopper H200s in” the second half of the yr, HSBC analyst Frank Lee wrote in a August note. He has a buy rating on the stock.

Correction: Colette Kress is CFO of Nvidia. An earlier version misspelled her name.