Investors and stocks markets face a “moment of truth” again when Nvidia, the behemoth chipmaker and AI technology bellwether, unveils its Q3 earnings after the US closing bell on Wednesday. There are big questions around stretched valuations in the technology sector and if AI stocks are in a bubble. Nvidia is itself is up more than 34% this year and carries the hopes of the risk assets and whether we see fresh record highs amid a year-end rally, or a more prolonged sell-off.
The semiconductor giant became the world’s first $5 trillion company last month and although it has lost a bit of that value since, it has a staggering 8% weighting in the S&P 500 and above 10% weighting in the Nasdaq, so it holds major clout in many global indexes, and it can easily sway markets on its own, due to its gargantuan market value.
High valuations and worries
These quarterly results are released when markets are worried about the bubble-like characteristics evident in the market, amid elevated traditional valuation metrics. The tech-laden Nasdaq 100 index trades at around 31 times expected earnings over the next year, above the historical median of 24 times. Nvidia itself is currently trading at about 53 times its expected earnings.
The huge sums of money being committed by AI companies to fund AI infrastructure is also a big concern, especially as it is being increasingly funded by debt. Last night Amazon raised $15bn in its first US dollar bond offering in three years, adding to the spree of jumbo debt sales by other tech firms like Meta and Alphabet as they race to fund AI infrastructure. The US/China AI race also continues to heat up, with worries out of the US, and participants, that China may be taking the lead. This was echoed by Nvidia CEO Huang who just last week said, “China will win the AI race”.
Of course there is still heavy optimism in the megacap tech firm, with several banks recently raising their price targets into earnings, citing Huang’s recent commentary that Nvidia has secured more than $500bln worth of orders for its Blackwell and next-gen Rubin chips through 2026. On the flip side, in recent weeks Michael Burry, who predicted the 2008 housing crash, bet against the AI rally with 1mln put options on NVDA, while SoftBank sold its entire stake in the company.
Expectations and guidance
Q3 adjusted EPS is forecast at $1.24 on revenues of USD 54.8bln and a guide to $61.5-62bln for Q4 with gross margins near 74% (Q3) and 74.7% (Q4). Looking at the breakdown, Data Centre is expected to generate $48.3bln, Gaming $4.41bln, Automotive $621mln, Professional Visualisation $611mln, OEM and other $169.5mln.
CEO Jensen Huang is expected to deliver a strong outlook, which is what we’ve become conditioned to see. Focus will be on margins and guidance, and updates on Nvidia’s target of an additional 14 million GPUs and progress on its $100 billion investment in OpenAI. The company will also face questions about recent stake reductions from major holders, adding to concerns that “circular” capital flows within the AI ecosystem may be inflating a bubble.
Market reaction
The reaction to Nvidia’s results could ripple through the broader markets, let alone AI and semiconductor space. Options pricing implies a ±6.5% move on the day after reporting, setting the platform for an implied ±1.1% move in the S&P 500. That is just below the long-term average of 7% but still implies a $250bn price swing after earnings. The recent record high printed at the end of October at $212.19.
It seems that anything less than another beat and raise may prove to be a disappointment which see sharp selling as markets buckle up for year-end. With the stock up over 110% since April, the pressure is on the AI megacap to deliver. Nvidia has only missed analyst estimates twice in the last five years and has beaten earnings estimates for nine consecutive quarters. But the stock has closed higher in just five of the last eight earnings releases.