Nvidia is world’s ‘most important stock’, putting pressure on Q2 earnings

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

Nvidia has been the biggest beneficiary of the AI ​​boom, seeing its market cap increase roughly ninefold since the end of 2022. But after hitting a record high in June and briefly becoming the world’s most valuable public company, Nvidia lost nearly 30% of its value over the next seven weeks, shedding roughly $800 billion in market cap.

There is currently a rally underway that has seen the share price fall about 7% below its all-time high.

With the chipmaker set to report quarterly results on Wednesday, stock volatility is at the top of Wall Street’s agenda. Any indication that demand for AI is slowing or that a leading cloud customer is tightening its belt could translate into a significant revenue hit.

“It’s the most important stock in the world right now,” Eric Jackson of EMJ Capital told CNBC’s “Closing Bell” last week. “If they lay an egg, that would be a big problem for the entire market. I think they’re going to surprise on the upside.”

Nvidia’s report comes weeks after its mega-cap tech peers reported earnings. The company’s name was mentioned in those analyst calls, as Microsoft, Alphabet, Meta, Amazon And Tesla are all investing heavily in Nvidia’s graphics processing units (GPUs) to train AI models and handle massive workloads.

Over the past three quarters, Nvidia’s revenue has more than tripled year-over-year, with the vast majority of the growth coming from the data center sector.

Analysts expect a fourth straight quarter of triple-digit growth, but at a reduced pace of 112% to $28.7 billion, LSEG said. From here, year-on-year comparisons become much more difficult, with growth expected to slow in each of the next six quarters.

Investors will want to keep a particularly close eye on Nvidia’s October quarter guidance, which is expected to post revenue growth of around 75% to $31.7 billion. Optimistic guidance suggests Nvidia’s deep-pocketed customers are signaling a continued willingness to open their wallets for its AI buildout, while a disappointing outlook could raise concerns that infrastructure spending has become frothy.

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

Much of the optimism in the report (shares rose 8% in August) comes from comments from top customers about how much they continue to spend on data centers and Nvidia-based infrastructure.

Last month, the CEOs of Google and Meta raved about the pace of their buildout, saying that underinvesting was a bigger risk than overspending. Former Google CEO Eric Schmidt recently told Stanford students, in a video that was later deleted, that he was hearing from top tech companies that they needed “$20 billion, $50 billion, $100 billion” worth of processors.

But while Nvidia’s profit margin has increased recently, the company still faces doubts about the long-term return on investment customers will see when purchasing devices costing tens of thousands of dollars each and ordered in large quantities.

During Nvidia’s last earnings report in May, CFO Colette Kress released figures showing that cloud providers, which account for more than 40% of Nvidia’s revenue, would generate $5 in revenue for every $1 spent on Nvidia chips over four years.

More metrics like this are likely to come. Last month, Goldman analysts wrote after a meeting with Kress that the company would share further ROI metrics this quarter “to build investor confidence.”

The other big question for Nvidia is the timeline for its next-generation AI chips, called Blackwell. The Information reported earlier this month that the company was facing production issues that would likely delay major shipments until the first quarter of 2025. Nvidia said at the time that production was on track to ramp up in the second half of the year.

The report comes after Nvidia CEO Jensen Huang surprised investors and analysts in May by saying the company will generate “a lot” of revenue from Blackwell this fiscal year.

While Nvidia’s current generation of chips, called Hopper, remains the best option for implementing AI applications like ChatGPT, more and more competition is emerging Advanced micro devicesGoogle and a handful of startups are putting pressure on Nvidia to maintain its performance lead through a smooth upgrade cycle.

Even with a potential Blackwell delay, that revenue could easily be pushed to the next quarter, while boosting current Hopper sales, particularly the newer H200 chip. The first Hopper chips were in full production in September 2022.

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

Many of Nvidia’s top customers say they need the extra processing power of Blackwell chips to train more advanced next-generation AI models. But they’ll take what they can get.

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

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