Nvidia, the world’s ‘most important stock’, faces mounting pressure on Q2 results

For Nvidia For investors, the past two years have been a fun ride, but lately there have been more roller coasters.

Nvidia, a major beneficiary of the AI ​​boom, has seen its market cap increase roughly ninefold since the end of 2022. But after setting a new record in June and briefly becoming the world’s most valuable public company, Nvidia has lost roughly 30% of its value over the next seven weeks, wiping out about $800 billion in market cap.

The stock is now in a rally that has pushed its stock price up about 7% of its all-time high.

As chipmakers report quarterly results on Wednesday, the biggest concern on Wall Street is stock price volatility. Any signs that AI demand is slowing or that major cloud customers are tightening their belts could potentially lead to a significant drop in sales.

“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’s going to be a huge problem for the entire market. I think they’re going to be a surprise on the upside.”

Nvidia’s report comes just weeks after tech giants reported earnings, and the company’s name was peppered throughout analyst calls. Microsoft, alphabet, Meta, Amazon and Tesla All of them have invested heavily in Nvidia’s graphics processing units (GPUs) to train AI models and handle massive workloads.

Nvidia’s revenue more than tripled on a year-over-year basis in the last three quarters, with most of the growth coming from its data center business.

Analysts expect triple-digit growth for the fourth consecutive quarter, but the pace of growth is expected to slow to $28.7 billion, down 112%, according to LSEG. Year-over-year comparisons are much more difficult here, with growth expected to slow over the next six quarters.

Investors will be particularly interested in Nvidia’s October quarter outlook, which calls for about 75% growth to $31.7 billion. An upbeat outlook continues to show that Nvidia’s deep-pocketed customers are willing to open their wallets to build AI, while a disappointing outlook could raise concerns that infrastructure spending is a bubble.

“The rapid growth in hyperscale capital expenditures over the past 18 months and the bright near-term outlook often lead investors to question the sustainability of the current capital expenditure path,” Goldman Sachs analysts wrote last month, recommending a buy on the stock.

Much of the optimism about the report (the stock is up 8% in August) comes from the view that major customers continue to spend heavily on data centers and Nvidia-based infrastructure.

Last month, the CEOs of Google and Meta enthusiastically endorsed their own pace of expansion, saying that underinvesting is a bigger risk than underspending. Former Google CEO Eric Schmidt recently told Stanford students in a video that “the best tech companies need $20 billion, $50 billion, $100 billion” worth of processors.

But while Nvidia’s profit margins have expanded recently, the company still faces questions about what the long-term return on investment will be for customers who buy devices that cost tens of thousands of dollars and are ordered in large quantities.

In Nvidia’s last earnings call in May, CFO Colette Kress provided a data point suggesting that cloud providers, which account for more than 40% of Nvidia’s revenue, would generate $5 in revenue for every $1 they spend on Nvidia chips over four years.

More such metrics are likely to emerge. Last month, Goldman analysts wrote that following their meeting with Kress, the company would share additional ROI metrics this quarter to “provide investors with confidence.”

Another major question facing Nvidia is the timeline for its next-generation AI chip, called Blackwell. The Information reported earlier this month that the company was facing production issues that would likely push back mass shipments to the first quarter of 2025. At the time, Nvidia said it expected production to ramp up in the second half of the year.

The report comes after Nvidia CEO Jensen Huang surprised investors and analysts in May when he said the company would generate “massive” revenue from Blackwell this fiscal year.

Nvidia’s current-generation chip, called Hopper, remains the premium option for deploying AI applications like ChatGPT, but competition is heating up. Advanced Micro DevicesGoogle and some startups are pressuring Nvidia to maintain its performance edge through smooth upgrade cycles.

Even with the potential for a Blackwell delay, revenue could be pushed to future quarters while it ramps up current Hopper sales, particularly the new H200 chip. The first Hopper chip was supposed to be in full production in September 2022.

“This timing shift is not a major concern as supply and customer demand have shifted rapidly to H200,” Morgan Stanley analysts wrote in a note this week.

Many of Nvidia’s biggest customers say they need the extra processing power of Blackwell chips to train more advanced next-generation AI models, but they’ll take what they can get.

“We expect Nvidia to de-emphasize Blackwell B100/B200 GPU allocations in the second half of this year, while increasing Hopper H200,” HSBC analyst Frank Lee wrote in an August note. He gave the stock a Buy rating.

Correction: Colette Kress is Nvidia’s CFO. A previous version misspelled her name.