Nvidia investors expect the chip designer to forecast quarterly revenue above estimates when it reports results on Wednesday. Their only question is, by how much? The US company that tried to buy British rival Arm and is a favorite among fund managers like Bailie Gifford American and Scottish Mortgage Investment Trust has been one of the biggest beneficiaries of the recent AI demand market rally, helping to make it one of the best-performing stocks in the S&P 500. Nvidia shares have nearly tripled in value this year, adding more than $700 billion to the company’s market valuation and making it one of the world’s most valuable publicly-traded technology companies.
The stock’s rise has been driven by a big boom in the popularity of generative artificial intelligence apps like OpenAI’s ChatGPT and Microsoft’s Bing search engine, both powered by Nvidia graphics processors. But the gains have also been fueled by expectations that Nvidia’s new GPU chips can help companies design computers faster and more cost-effectively.
Those hopes aren’t entirely unfounded, but they could be overdone. Nvidia’s earnings report will be a significant test to see whether the tech sector’s current rally is sustainable.
Investors will seek evidence that the surge in AI demand is real when Nvidia releases its second-quarter results on Wednesday. The company’s most popular chips — the Nvidia GeForce GPUs — are used in many data centers, where it has seen sales jump by 11% annually during the first quarter. That boost primarily resulted from cloud service providers upgrading their systems to take advantage of Nvidia’s newest AI-accelerated GPUs, which are designed to help computers process large amounts of information more quickly than previous models.
But Nvidia’s consumer-focused gaming business saw revenue fall by 13% from a year ago, partly due to the Covid pandemic and partly because gamers are spending less on upgrades. The company’s stock has climbed so far this year that it has 49 “buy” recommendations from analysts, more than any other S&P 500-listed company.
But the company’s stock is currently trading at 40 times its expected forward earnings, far higher than rival Advanced Micro Devices (AMD) and even more than Apple (AAPL). As a result, it will be necessary for Nvidia to deliver growth when it reports earnings this week. And while most analysts expect Nvidia to beat consensus EPS estimates, there’s an outside chance it might miss them by a wide margin. If that happens, the stock could fall. That’s why it’s worth looking at Nvidia’s earnings surprise history to get a sense of how much the market might be pricing in a beat or a miss.
