Nvidia earnings will be major test for AI demand, market rally
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[August 21, 2023] By
Chavi Mehta
(Reuters) - 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 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 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.
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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.
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![](../images/082123PIX/busine97.jpg)
A view of a Nvidia logo at their
headquarters in Taipei, Taiwan May 31, 2023. REUTERS/Ann Wang/File
Photo
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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.
(Reporting by Chavi Mehta in Bengaluru, Writing by Aditya Soni;
Editing by Anil D'Silva)
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