Nvidia is the world’s ‘most important stock’, increasing pressure on 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 main beneficiary of the artificial intelligence boom, Nvidia has seen its market cap rise about ninefold since the end of 2022. But after hitting a record in June and briefly becoming the world’s most valuable public company, Nvidia has continued to lose nearly 30% of its value in seven the following week, shedding about $800 billion in market cap.

Right now, it’s in the midst of a rally that’s pushed the stock around 7% off its all-time high.

With the chipmaker set to report quarterly results on Wednesday, stock volatility is top of mind for Wall Street. Any indication that demand for AI is waning or that major cloud customers are simply tightening their belts could result in significant revenue shifts.

“This is the most important stock in the world right now,” EMJ Capital’s Eric Jackson told CNBC’s “Closing Bell” last week. “If they lay eggs, it will be a major problem for the whole market. I think they want to surprise to rise.”

Nvidia’s report comes weeks after its megacap tech peers reported earnings. The name of the company was sprinkled throughout the analyst’s phone, as Microsoft, Alphabet, Meta, Amazon and Tesla all spend heavily on the Nvidia graphics processing unit (GPU) to train AI models and run massive workloads.

In the past three quarters of Nvidia, revenue has more than tripled on an annual basis, with most of the growth coming from the data center business.

Analysts expected a fourth quarter of triple-digit growth, but at a pace that decreased 112% to $28.7 billion, according to LSEG. From here, year-on-year comparisons become more difficult, and growth is expected to slow in each of the next six quarters.

Investors will pay particular attention to Nvidia’s forecast for the October quarter. The company is expected to show growth of about 75% to $31.7 billion. An optimistic guide would suggest that Nvidia’s deep-pocketed clients are signaling a willingness to open their wallets to build AI, while a disappointing forecast could fuel concerns that infrastructure spending has become frothy.

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

A lot of optimism led to the report – the stock rose 8% in August – because of comments from top customers about how much they continue to shell out for data centers and Nvidia-based infrastructure.

Last month, the CEOs of Google and Meta enthusiastically endorsed the development measures and said that underinvesting is a bigger risk than overspending. Former Google CEO Eric Schmidt recently told students at Stanford, in a video that has since been deleted, that he heard from top tech companies “they need $20 billion, $50 billion, $100 billion processors”.

But while Nvidia’s profit margins have continued to shrink, the company still faces questions about the long-term investment its clients will see from buying devices that cost tens of thousands of dollars each and are ordered in bulk.

During Nvidia’s earnings call last May, CFO Colette Kress provided data points showing that the cloud provider, which accounts for more than 40% of Nvidia’s revenue, will return $5 for every $1 spent on Nvidia chips in four years.

More statistics like that are on the way. Last month, Goldman analysts wrote, after a meeting with Kress, that the company would share more ROI metrics this quarter “to instill confidence in investors.”

Another major question facing Nvidia is the timeline for its next-generation AI chip, which Blackwell calls it. The information was reported earlier this month that the company is facing production problems, which will cause large shipments to return to the first quarter of 2025. Nvidia said that the production is on track to ramp 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 would see “significant” Blackwell revenue this fiscal year.

While Nvidia’s current generation chip, called Hopper, remains the premium choice for deploying AI applications like ChatGPT, competition is emerging from Advanced Micro DevicesGoogle and smattering from the beginning, which forced Nvidia to maintain the lead performance through a smooth upgrade cycle.

Even with the potential delay of Blackwell, the revenue that can only be pushed back to the future quarter while boosting current Hopper sales, especially the new H200 chip. The first Hopper chips are due in September 2022.

“The timing shift is not particularly significant, as both supply and customer demand are quickly shifting to H200,” Morgan Stanley analysts wrote in a note this week.

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

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

Correction: Colette Kress is Nvidia’s CFO. The previous version misspelled the name.