AI demand faces test as chip maker Nvidia prepares to unveil earnings

Nvidia chief executive Jensen Huang: 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.

Nvidia 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, or AI, apps, virtually all of which are powered by its graphics processors.

Nvidia shares have tripled in value this year, adding more than $700bn (€645bn) to the company's market valuation and making it the first trillion-dollar chip firm. The shares rose again in the latest session. 

The blistering rally in its shares means that Nvidia, which is led by chief executive Jensen Huang, 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 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 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."

Analysts expect the chip company to guide for a rise of about 110% in third-quarter revenue to $12.5bn. Nvidia has only forecast revenue below estimates once in the past two years.

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 reading of 29 times.

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

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. 

Reuters