Nvidia faces stiff test on Wall Street this week after ‘parabolic’ stock rally

When Nvidia reports fiscal fourth-quarter earnings after the market close Wednesday, it will do so as the world’s third most valuable public company. Investors are giving the company little margin for error.

Nvidia’s stock price has soared fivefold since the end of 2022, as demand has skyrocketed for its graphics processing units that sit at the heart of the artificial intelligence boom. Nvidia’s chips, such as the H100, are used by AI developers to create cutting-edge models like the ones OpenAI used to develop ChatGPT.

The company’s market cap climbed to about $1.8 trillion last week, surpassing Alphabet and Amazon and now trailing only Microsoft and Apple.

“NVDA’s stock appreciation has been parabolic,” analysts at Bank of America wrote in a report Thursday. They reiterated their buy rating and said, “We think one interpretation of this NVDA move is a mix of fear and greed and indiscriminate investor chase for all things AI.”

The other megacap tech companies all reported quarterly results weeks ago. All eyes are now on Nvidia.

Analysts are expecting a startling 240% increase in revenue from a year earlier to $20.6 billion for the period ending Jan. 28, according to LSEG, formerly known as Refinitiv. For every new dollar of sales the company generates, it’s squeezing out even more profit.

Net income likely surged more than sevenfold to $10.5 billion from $1.41 billion a year earlier. In the third quarter, Nvidia’s gross margin jumped to 74% from 53.6% the prior year.

Outsize growth is expected in Nvidia’s data center business, which includes its AI chips. Analysts project an almost fourfold increase in revenue on an annual basis to $17.06 billion, according to FactSet.

Wall Street will be listening closely to commentary from Nvidia CEO Jensen Huang for an indication of how long these stratospheric growth rates are expected to last. The company already reported 200% year-over-year growth in the third quarter, and analysts are expecting a similar rate of expansion in the first period of this year.

One potential concern is that many of Nvidia’s GPU sales are going to big tech companies such as Microsoft, Amazon, Meta and Google. Any or all of them could decide to slow AI hardware spending at some point if they’re not seeing intended benefits.

“All four communicated plans to significantly increase investment in their AI infrastructure this year, which bodes very well for NVDA’s fourth quarter results and 2024 Q1 guidance,” wrote D.A. Davidson analyst Gil Luria in a note Thursday. He has a neutral rating on the stock with a $410 price target.

However, he warns that the long-term picture for demand from Nvidia’s top customers could be more mixed.

“They referred to their purchasing as ‘flexible’ and ‘demand driven,’ implying they would scale it down if we got past the current hype cycle,” Luria wrote. “While we do not believe we are there yet, we are seeing possible early signs.”

Nvidia’s gaming segment, which includes graphics cards for PCs and laptops and used to be the company’s primary business, is also expected to grow, but at a more measured rate of 49% to $2.72 billion in revenue. Some of Nvidia’s gaming cards are also used by small companies and researchers for AI.

Thomas O’Malley of Barclays said the report will be fairly simple to analyze.

“The [data center] GPU number will be the only key metric that matters along with commentary on broader market adoption,” O’Malley, who has a neutral rating on the shares, wrote Friday. “Most conversations we have center on the sustainability of the current run-rate in [data center], which is approaching $100B per year.”

Other analysts are focused on whether Nvidia has enough supply to meet short-term demand, in part because the company relies on Taiwan Semiconductor Manufacturing Company for its chips. There’s also budding anticipation regarding the company’s newest top-end AI chip, called B100, which starts shipping this year.

“We are particularly excited about Nvidia’s plans to launch the B100 later in 2024 and the X100 in 2025,” wrote Melius Research analyst Ben Reitzes, who recommends buying the stock, in a report last week. “If the upgrade from the A100 to the H100 is any indication, the Total Cost of Ownership benefit for data center operators will be enticing enough to fuel the upgrade and make 2025 a growth year.”

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