Nvidia helped spark the AI rally. Its earnings could revive it.
The company’s revenue forecast, nearly double Wall Street’s forecast, showed the starting gun firing in the race to develop artificial intelligence that will value Nvidia shares at more than $3.5 trillion over the next 2.5 years. This also helped the Nasdaq Composite rise more than 88% to the record it reached in late October.
Next week’s update, scheduled for after the market close on Wednesday, could be equally transformative.
Skepticism towards the AI trade is higher than ever since Nvidia’s 2023 forecast. Investors are both questioning the return on billions of dollars spent by tech companies to stake their bets on the new technology land grab and worrying about when that investment can meaningfully increase profitability.
Stocks are showing their effects. In fact, Meta Platforms is down nearly 20% since reporting mixed third-quarter earnings on Oct. 28. The administration announced a major step forward in AI spending and promised to increase that figure “considerably” next year.
The index of the Magnificent Seven technology companies has fallen around 5.8% since Meta’s update. Nvidia fell more than 8.1%. Meanwhile, the S&P 500 is on track for one of its worst November performances since 2008.
Companies like Oracle and CoreWeave, which both rely on leasing AI data centers, have been punished in both stock and credit markets for rapidly increasing their overall borrowing to trap low-margin businesses.
“Nvidia faces the difficult task of meeting both high earnings expectations and high skepticism about its AI capex, which will likely only resolve once broader market volatility subsides,” said Bank of America analyst Vivek Arya.
Nvidia’s role in the AI investment boom is, of course, very different from that of companies offering AI services or trying to build infrastructure. Its revenue model is unassailable, it carries a double-A credit rating, the second highest on the scale, and is expected to easily generate more than $70 billion in net income this year alone.
This means what they have to say about AI demand could be particularly valuable. The company isn’t trying to win in the AI space — it already is — and that success gives it a panoramic view of what its customers are doing.
CEO Jensen Huang has signaled that he could sell the upcoming Rubin version, as well as Blackwell chips worth about $500 billion, by the end of next year.
Supply constraints likely make that unachievable, but it suggests Huang isn’t worried about demand, given an unusual amount of confidence from Wall Street.
“I think we’re probably the first technology company in history that could see a half-trillion-dollar cumulative Blackwell and Rubin rise to 2026,” Huang said at an Nvidia-led tech event in Washington, D.C., last month.
But Nvidia may need to offer an even more positive outlook to boost its shares and restore confidence in the AI business. Investors do not believe the White House will allow Nvidia to sell its next-generation chips in China. A separate concern is that demand growth could slow if some of Nvidia’s largest hyperscaler customers roll back data center capacity plans or opt for cheaper solutions from rivals such as Advanced Micro Devices.
That may be why options traders are pricing in a post-earnings swing of about 6.2% in either direction for Nvidia shares. This is the biggest forecast move in more than a year.
But Wedbush analyst Dan Ives is confident Nvidia’s outlook can calm market jitters and partially silence the “AI bubble talk.”
“Nvidia’s earnings next week will be another key validation moment for the AI Revolution and a positive catalyst for tech stocks toward the end of the year as investors continue to underestimate the scale and scope of AI spending,” he said in a note published Friday.
But Gene Munster, managing partner of Deepwater Asset Management, has a slightly different approach. Munster is bullish on Nvidia shares and the AI revolution in general, but he’s not sure investors will be reassured.
“Crosscurrents around next week’s earnings have created a Catch-22 for the AI complex,” he said in a recent earnings preview. “Stronger guidance could raise concerns about excessive spending, while a modest increase could be read as the first sign that growth is returning to normal faster than expected.”
“It’s going to be a coin toss as to how investors respond to positive guidance,” he said.
Investors may need better rates than that to boost tech stocks and the broader market through year-end.
Write to Martin Baccardax at martin.baccardax@barrons.com
