Nvidia is the world’s “most important stock,” adding pressure to second-quarter earnings

For Nvidia for investors, the past two years have been fine. But recently it’s been more of a roller coaster ride.

As the main beneficiary of the artificial intelligence boom, Nvidia has seen its market capitalization rise by about nine times by the end of 2022. But after hitting a record in June and briefly becoming the world’s most valuable public company, Nvidia has lost nearly 30% of its value over the next seven weeks, shedding about $800 billion in market value.

Now, it’s in the midst of a rally that has pushed the stock to about 7% of its all-time high.

With the chipmaker reporting quarterly results on Wednesday, the stock’s volatility is in the spotlight on Wall Street. Any indication that AI demand is slowing or that a leading cloud customer is tightening its belt modestly translates into potentially significant revenue slippage.

“It’s the most important stock in the world right now,” EMJ Capital’s Eric Jackson said on CNBC’s “Closing Bell” last week. “If they lay an egg, it would be a big problem for the whole market. I think they will surprise the top.”

Nvidia’s report comes weeks after its megacap tech peers posted gains. The company’s name was sprinkled throughout these analyst calls, such as Microsoft, Alphabet, After, Amazon and Tesla All spend heavily on Nvidia’s graphics processing units (GPUs) to train AI models and run massive workloads.

In Nvidia’s last three quarters, revenue more than tripled year-over-year, with the vast majority of growth coming from its data center business.

Analysts expect a fourth consecutive quarter of triple-digit growth, but at a reduced rate of 112% to $28.7 billion, according to LSEG. From here, year-over-year comparisons get much tougher, and growth is expected to slow in each of the next six quarters.

Investors will pay close attention to Nvidia’s forecasts for the October quarter. The company is expected to show growth of about 75% to $31.7 billion. The upbeat guidance would suggest that Nvidia’s deep-pocketed customers are signaling a continued willingness to open their wallets to build artificial intelligence, while a disappointing forecast could raise concerns that infrastructure spending has become frothy.

“Given the surge in leveraged capital over the past 18 months and the strong near-term outlook, investors often question the sustainability of the current capital trajectory,” Goldman Sachs analysts recommending the stock as a buy wrote in a note last month. .

Much of the optimism in the report — the stock was up 8% in August — was driven by comments from top customers about how much they continue to pay for Nvidia-based data centers and infrastructure.

Last month, the CEOs of Google and Meta enthusiastically defended their growth rate and said that underinvesting was a bigger risk than overspending. Former Google CEO Eric Schmidt recently told students at Stanford, in a video that has since been removed, that he was hearing from top tech companies “they need $20 billion, $50 billion, $100 billion processors.”

But while Nvidia’s profit margin has been widening of late, the company still faces questions about the long-term return on investment customers will see from buying devices that cost tens of thousands of dollars each and are ordered in bulk.

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

More such statistics are probably on the way. Last month, Goldman analysts wrote, after meeting with Kress, that the firm would share further ROI metrics this quarter “to instill investor confidence.”

The other big question facing Nvidia is the timing of its next-generation AI chips, called Blackwell. The Information was mentioned earlier this month that the company is facing production issues, which will likely push major shipments back to the first quarter of 2025. Nvidia said at the time that production was on track to pick up in the second half of the year.

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

While Nvidia’s current generation of chips, called Hopper, remains the premium choice for developing AI applications like ChatGPT, competition is emerging from Advanced gadgetsGoogle and a host of startups, which are pushing Nvidia to maintain its performance lead through a smooth upgrade cycle.

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

“This change in timing is of little consequence as customer supply and demand has quickly shifted to H200,” Morgan Stanley analysts wrote in a note this week.

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

“We expect Nvidia to de-emphasize Blackwell B100/B200 GPU allocation in favor of increasing 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 Nvidia’s CFO. An earlier version misspelled her name.