Nvidia Quarterly Earnings Will Assess Demand for AI and Rule the Tech Sector

The market value of Nvidia has increased by more than $700 billion this year, making it the first chip maker to reach the trillion-dollar threshold

When Nvidia publishes earnings on Wednesday, investors anticipate the chip designer to project quarterly sales above estimates. All they want to know is how much. The growth of ChatGPT and other generative artificial intelligence applications, almost all of which are driven by the business’s graphics processors, has benefited the company the most. The market value of Nvidia has increased by more than $700 billion (approximately Rs. 5,81,500 crore) this year, making it the first chip company to reach the trillion-dollar barrier. Nvidia shares have tripled in value this year. On Monday, they experienced their greatest gain in almost three months when they closed 8.5 percent higher.

Because of the sharp increase in its share price, Nvidia has limited space for any earnings-related disappointment, and anything less than a prediction that is higher than expected might send its stock down, according to some analysts.

Given that the majority of the S&P 500’s gains this year have come from the AI-driven advance in Nvidia and Big Tech firms, the outcomes might also determine the direction of the broader market this week.

Inge Heydorn, partner at GP Bullhound, who holds both Nvidia and AMD shares, stated, “I’ve been covering tech since 1994 and I have never seen an environment where you are so dependent on one company to deliver.”

The last pillar of growth, AI, is what everyone depends on. We could be in for quite a significant market correction if Nvidia displays weakness.

According to Refinitiv, Wall Street anticipates the chip maker to advise for a third-quarter sales increase of nearly 110 percent to $12.50 billion (approximately Rs. 10,384 crore). In the past two years, Nvidia has only once predicted revenue that was lower than expected.

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While buy-side expectations have increased to $14 billion (approximately Rs. 11,630 crore), Citi analysts stated last week that they were only modelling a revenue prediction of around $12 billion (roughly Rs. 99,687 crore).

Last week, at least 10 brokerages increased their price targets for the stock, raising the median estimate to $500 (about Rs. 41,500), or 15.5 percent more than the previous closing.

The company’s 12-month forward price-to-earnings ratio suddenly increased to more than 80 when it predicted second-quarter revenue growth of over 50% in May, but it has subsequently declined as analysts have raised their profits estimates.

It currently trades at a significantly higher multiple than AMD’s 29, close to 40 times projected earnings for the following year.

Investors will be examining sales at Nvidia’s data centre division, which houses the company’s highly prized H100 chip used in AI, to determine whether the price is reasonable.

DIVIDE IN SUPPLY-DEMAND

The H100 chip is selling for double its original price of $20,000 (approximately Rs. 16 lakh), according to analysts, who also noted that Nvidia is only able to supply half of the demand.

Even then, there are some concerns about growth because a portion of the spike in demand is coming from China, where businesses are storing chips due to concerns about additional US export restrictions.

“I don’t think the risk of losing China business is incorporated in numbers, and this is also somewhat disturbing the picture,” Heydorn added.

The disparity between supply and demand may also prompt some customers to turn to rival AMD, whose M1300X chip aims to compete with Nvidia’s most potent AI product.

According to Piper Sandler’s Harsh Kumar, AMD’s chips could be up to 50% less expensive than Nvidia GPUs. Meta or Google may want to consider reducing their price.

According to analysts, AMD anticipates beginning chip shipments in the fourth quarter and may hold around 10% of the market for AI chips in 2019.

However, they cautioned AMD that catching up to Nvidia’s software CUDA, which is now the industry standard in AI and has a significant lead over the company’s comparable offering, will be difficult.

In the past, the market leader in semiconductors has typically held a 70% to 80% share, but buyers have always wanted to have a backup source available in case the leader overcharges. In this case, that backup source is AMD, according to Kumar.