Investors and stocks markets face a “moment of truth” again when Nvidia, the giant chipmaker and technology bellwether, unveils its hotly anticipated earnings after the US closing bell on Wednesday. Markets have rebounded strongly since the plunge on Liberation Day in April, helped by Nvidia’s over 100% gains. The tech behemoth is up more than 30% this year and carries the hopes of the latest stock market rally, which continues to make fresh record highs.
Bullish investors are hoping the results of Nvidia, the tech darling for so long, can soothe fears about AI spending and effectively confirm that the stock market’s move north isn’t just a technology bubble. The chipmaker is the biggest weight in the S&P 500 at almost 8%, and its position at the centre of AI development is unparalleled. With a market cap of $4.3 trillion, the company has been a major contributor to the benchmark S&P 500’s 10% increase this year, due to its gargantuan market value.
Lofty markets valuations
These quarterly results are released when some are questioning the bubble-like characteristics evident in the market, which include a resurgence in meme-stocks, crypto and meme coin price spikes, and elevated traditional valuation metrics. The tech-laden Nasdaq 100 index trades at around 28 times expected earnings over the next year, above the long-term average of 22 times. Nvidia itself is currently trading at about 40 times its expected earnings.
The recent mini correction in technology stocks came on the back of downbeat comments from OpenAI boss Sam Altman, who said the AI market appears to be in a bubble, with investors overexcited about the technology. However, he did go on to affirm AI’s status as a profoundly important development. There was also a gloomy report from researchers at MIT which found that 95% of AI pilots fail as they deliver zero return on investment.
Expectations, and watch guidance
Regarding analyst expectations, Q2 EPS is forecast at $1.00 with revenue jumping 53.2% to $46.02bn, and data centres providing $41bn of that. Gross profit margin is expected at 72%. In terms of forward guidance, the next quarter’s (Q3) revenue is seen at USD 52.96bn, with EPS of $1.20 and gross margins guided to 73%, with full-year revenue seen at $201.4bn and EPS of $4.37. The fundamentals for the tech giant remain strong – GPU supply rose 40% last quarter and should grow another 20% with Blackwell (B200) ramping, while the new Blackwell Ultra (B300) ships in October.
The key focus for markets will be Nvidia’s business in China, following the deal with the White House and Beijing’s subsequent efforts to stall chip imports. The former agreement struck with the US government will see them take 15% of any China revenue. Some analysts expect Nvidia to post strong second quarter results but then guide cautiously for October due to China-related risks.
That means they might exclude China revenue from guidance amid several risks: pending license approvals, those potential 15% AI export taxes, and pressure on Chinese firms to use local chips. Notably, last year, China accounted for 13% of Nvidia’s revenue while the chipmaker could take a 5 to 15% hit to gross margins on China-bound chips due to the federal deal, according to Bernstein analysts.
Market reaction
It seems that anything less than another beat and raise may prove to be a disappointment which could hurt the wider bullish momentum in risk assets. With the stock up over 100% 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 consistently beaten consensus since 2017. But the stock has closed higher in just five of the last eight earnings releases.
To gauge the potential market moves, options markets are seeing an implied move on the day of reporting of +/- 6%. That is just below the long-term average of 7% but still implies a $260bn price swing after earnings. The recent record high printed earlier this month at $184.48 and initial support below sits around $168.80/170.