Nvidia, the leading chip designer, is expected to exceed quarterly revenue estimates when it announces its results on Wednesday. Investors are eager to see by how much the company will surpass expectations. Nvidia has experienced significant growth this year, largely due to the increasing popularity of ChatGPT and other generative AI applications that rely on its graphics processors. As a result, the company’s shares have tripled in value, adding over $700 billion to its market valuation and making it the first trillion-dollar chip firm.
During Monday’s trading session, Nvidia’s shares saw their biggest surge in almost three months, closing 8.5% higher. However, analysts have cautioned that the company has little room for disappointment in its earnings report. Anything less than a higher-than-expected forecast could trigger a significant decline in the company’s stock price. Furthermore, the outcome of Nvidia’s results could have broader implications for the market, as a significant portion of the S&P 500’s gains this year have been driven by the AI-driven rally in Nvidia and other big tech stocks. The dependency on Nvidia’s performance has led some analysts to express concerns about the broader market’s stability. Inge Heydorn, a partner at GP Bullhound, which owns shares in both Nvidia and AMD, stated, “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 analysts expect Nvidia’s third-quarter revenue to rise by approximately 110% to $12.50 billion. While Citi analysts predicted a more conservative revenue forecast of around $12 billion, expectations among buyers have increased to $14 billion. Several brokerages have raised their price targets on Nvidia shares, pushing the median view to $500, which is 15.5% higher than the stock’s previous closing price.
Although Nvidia’s forward price-to-earnings ratio surged to over 80 following its second-quarter revenue forecast in May, it has since decreased as analysts raise their earnings expectations. The company now trades at nearly 40 times the consensus earnings for the next 12 months, significantly higher than rival chipmaker AMD’s ratio of 29. Investors will closely monitor sales at Nvidia’s data center unit, particularly its H100 chip used in AI, to determine whether the company’s valuation is justified.
However, analysts have noted that Nvidia can only meet about half of the demand for its H100 chip, causing its price to double from its original price of $20,000. This trend could persist for several quarters as demand for the chip remains high. Nevertheless, concerns have been raised about the potential impact of China’s demand, as the country’s companies are stockpiling chips due to fears of further US export restrictions. Heydorn stated, “I don’t think the risk of losing China business is incorporated in numbers, and this is also somewhat disturbing the picture.” The supply-demand divide may prompt some buyers to turn to AMD as an alternative.
AMD is looking to challenge Nvidia’s dominance in AI workloads with its M1300X chip, which could be up to 50% cheaper than Nvidia’s GPUs. Analysts predict that AMD could control around 10% of the AI chip market next year once it begins shipping the new chip in the fourth quarter. However, they also caution that AMD faces challenges in catching up with Nvidia’s software CUDA, which is already considered the industry standard in AI and has a significant head start over AMD’s comparable offering.
