Nvidia's Q2 Earnings: The AI Market Hangs in the Balance
It's a rare moment in global financial markets when everything hangs on a single earnings report. While this has been the case for Nvidia for the past few quarters, this one lands at a particularly quiet moment for broader markets and has taken on extra significance.
Nvidia, the artificial intelligence chipmaker whose stock has helped power the market's feverish rally this year, reports quarterly earnings after the close. Shares of Nvidia, though down 2% on Wednesday morning, are up a dizzying 154% this year thanks to the AI frenzy. More than that, shares of Nvidia have surged about 3,000% over the past five years. That means anyone who invested $100,000 in the stock back then — when it was little known to many people — would now have roughly $3 million.
The company's market value is now over $3 trillion, one of only three US companies ever to achieve that milestone. Nvidia's outsized roughly 7% weighting in the S&P 500 means that large swings in the stock can have a sizeable impact on the broader market. The chipmaker's stock has averaged an 8.1% one-day swing in either direction in reaction to earnings, according to Bespoke Investment Group. That has translated to an average 0.5% move in the overall benchmark index.
The company's “earnings report has become the world’s most important financial news event. Federal Reserve officials must be getting nervous,” wrote Bespoke in a Wednesday note.
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The Santa Clara, California-based company has trounced analysts’ earnings expectations in recent quarters, and some investors say they expect the same this time around. Wall Street analysts expect Nvidia to post sales and profit growth of more than 100% year-over-year for the second quarter, according to Refinitiv estimates.
Nvidia is heralded for its processors, largely viewed as the best for powering artificial intelligence technology. The company has seen a monster run in its stock over the last couple of years after the creation of OpenAI’s ChatGPT in 2022 helped spur an AI craze on Wall Street.
Investors will look to the AI bellwether for clues about the demand for artificial intelligence when the company reports earnings after the bell. As companies continue pumping cash into developing their AI products and tools, Wall Street in recent weeks has become skeptical about whether artificial intelligence will result in massive productivity gains and a boost to firms’ top lines.
Dave Sekera, chief US market strategist at Morningstar, said investing in AI isn’t only a matter of growth — tech companies also need to invest in AI to keep themselves from falling behind their competitors.
“A lot of that capex spending on AI is needed to protect the existing business from AI upstarts that we see out there, and as firms fail to invest enough in AI and especially in the tech sector, you could become quickly antiquated,” wrote Sekera in a Tuesday note.
The AI Spending Spree: A Boost to Nvidia's Bottom Line
But at least for now, it appears Nvidia has little to worry about in terms of its dominant position as a beneficiary of tech capital expenditures, as Silicon Valley heavyweights continue to expand their investments in AI infrastructure, much of which will go to purchasing chips from Nvidia.
In their own earnings reports earlier this month, Google, Microsoft and Meta Platforms all signaled that they would be upping their AI spending.
Meta said it expects full-year capital expenditures to be between $37 billion and $40 billion, raising the low end of its guidance from the previous quarter by $2 billion. Microsoft said it expects to spend more in fiscal year 2025 than its $56 billion in capital expenditures from 2024. Google projected capital expenditure spending “at or above” $12 billion for each quarter this year. (Even for extremely rich companies, those are big numbers — for Google, its second quarter capital expenditures amounted to about 17% of its total sales).
That should mean that even if the Nvidia hype — which has reached such a point that people are organizing earnings call listening parties as if it’s a championship game — dies down, the company’s fundamentals should remain strong for the foreseeable future.
As Google CEO Sundar Pichai put it, “the risk of underinvesting (in AI) is dramatically greater than the risk of overinvesting.”
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Sales growth will be the focus on Nvidia’s results after earlier reports from AI darlings like Alphabet Inc. and Amazon.com Inc. showed huge capital outlays producing relatively puny bumps in revenues. For five quarters now, the chipmaker has far outstripped expectations and promised even bigger hauls to come. It has done this by becoming the primary beneficiary of billions in AI spending, so any deviation from that trend would raise questions about the technology’s promise.
That pivotal role has effectively transformed the once obscure semiconductor manufacturer into a key measure of US economic strength.
“It shouldn’t be a bellwether for the economy,” said Shana Sissel, founder and president at Banríon Capital Management. “But it has become one because of the size and the impact of the stock on the overall market.”
Analysts expect Nvidia’s quarterly revenue to be around $29 billion, more than double what it reported a year ago. And they anticipate another boost in guidance for future sales. But there is one new wrinkle — the company has to give an update on its next-generation Blackwell chip amid reports of delays and design flaws. The company said in early August that production is on track to ramp in the second half of the year.
“Concerns about the Blackwell chip delay could weigh on the upside to expectations for fiscal 2025, making management’s comments — especially a reassuring 2025 outlook — critical,” Bloomberg Intelligence analysts led by Kunjan Sobhani wrote in an Aug. 21 note.
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“Everybody’s going to be mulling over every single word,” he said.
Analysts and investors will also be watching for signs that another Nvidia chip, the H-200, is seeing demand that could offset pushing out revenue from Blackwell. If Nvidia delivers solid results with its current slate of chips, it likely bodes well for the next-generation product.
“It’s probably a good sign if they put up really good numbers here and those are due to strong demand for H-200,” Gabelli’s Belton said. “That probably paints an encouraging picture for incremental demand for Blackwell into next year.”
Nvidia's Future: The AI Hype and the Reality
Of course, Wall Street remains overwhelmingly bullish on shares of Nvidia. The stock has 66 buy ratings, 8 holds and no sells, according to data compiled by Bloomberg. Its 12-month price target of around $145 implies a gain of roughly 16% from where they currently trade. Nvidia’s valuation has also compressed, with the shares trading at a blended forward price-to-earnings ratio of about 38 times, down from 44 times in June and north of 60 times last year. The S&P 500 trades at roughly 21 times its forward earnings.
Concerns about how long heavy spending on AI will continue and worries around the Blackwell chip weighed on the shares in the early August trough. But the rally since shows that investors are still willing to buy dips in the stock as Big Tech’s AI mania shows few signs of stopping — yet.
“The bar has been raised, I think, in the last few quarters,” Belton said. “If you think about what happened with all the megacap stocks throughout this earnings cycle, I think the market definitely wants to see a healthy beat and forward quarter guidance above published estimates. I think this recent run up for near-term trading really matters.”
Nvidia's Earnings: A Signal for the Future of AI?
Nvidia's earnings report is not just a financial event; it's a referendum on the future of AI. Investors are looking for confirmation that the AI spending boom is real and that Nvidia is poised to continue to be the main beneficiary. If Nvidia delivers on these expectations, it could further fuel the AI mania and solidify its position as a key player in the tech industry. However, any missteps, especially regarding the Blackwell chip, could signal a cooling of AI enthusiasm and a setback for the company's ambitious growth plans. The AI market is watching closely.
