Nvidia earnings will be major test for AI demand, market rally

The company has been the biggest beneficiary of the rise of ChatGPT

(Reuters) - Nvidia (NVDA.O) 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 company has been the biggest beneficiary of the rise of ChatGPT and other generative artificial intelligence apps, virtually all of which are powered by its graphics processors.

Nvidia shares have nearly tripled in value this year, adding more than $700 billion to the company's market valuation and making it the first trillion-dollar chip firm. They were up more than 2% in premarket trading on Monday.

The blistering rally in its shares means that Nvidia has little room for any earnings-related disappointment and anything other than a higher-than-expected forecast could trigger a rout in its stock, some analysts have warned.

The results could also dictate the direction of the wider market this week, as most of the S&P 500's gains this year have come from the AI-driven rally in Nvidia and Big Tech stocks.

"I've been covering tech since 1994 and I have never seen an environment where you are so dependent on one company to deliver," said Inge Heydorn, partner at GP Bullhound, which owns both Nvidia and AMD (AMD.O) shares.

"AI is really the last pillar of growth and everybody is depending on it. If Nvidia shows weakness, we could be in for quite a substantial correction in the market."

Wall Street expects the chip company to guide for a rise of about 110% in third-quarter revenue to $12.50 billion, according to Refinitiv. Nvidia has only forecast revenue below estimates once in the past two years.

Citi analysts said last week they were only modeling a revenue forecast of around $12 billion, but buy-side expectations have gone up to $14 billion.

At least 10 brokerages raised their price targets on the stock last week, pushing the median view to $500, which is 15.5% higher than its last close.

While the company's 12-month forward price-to-earnings ratio soared dramatically to more than 80 after its second-quarter revenue forecast of over 50% growth in May, it has come down since then as analysts raise their earnings expectations.

It now trades at nearly 40 times the consensus earnings for the next 12 months, much higher than AMD's 29.

Investors will be looking at sales at Nvidia's data center unit, home to its prized H100 chip used in AI, to see if the valuation can be justified.

SUPPLY-DEMAND DIVIDE Analysts said Nvidia is able to meet only half the demand and its H100 chip is selling for double its original price of $20,000, adding the trend could go on for several quarters.

Still, there are some fears about growth as some of the demand surge is coming from China, where companies are stockpiling chips over worries about more U.S. export curbs.

"I don't think the risk of losing China business is incorporated in numbers and this is also somewhat disturbing the picture," Heydorn said.

The supply-demand divide could also lead some buyers to turn to rival AMD, which is looking to challenge Nvidia's most powerful offering for AI workloads with its M1300X chip.

"AMD's chips could be as much as 50% cheaper than Nvidia GPUs and somebody like Meta or Google may want to look at lowering their cost," Piper Sandler's Harsh Kumar said .

AMD expects to start shipping the chip in the fourth quarter and could control roughly 10% of the AI chip market next year, analysts said.

But they warned AMD will face an uphill battle in catching up with Nvidia's software CUDA, which is already the industry standard in AI and has a major head start over the company's similar offering.

"Historically in semiconductors, the leader always has 70% or 80% share of the market but the customers always want to keep a second source around, so that the leader doesn't overcharge, and that second source here is AMD," Kumar said.