Nvidia's earnings will be the AI hype cycle’s biggest test

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Nvidia (NVDA) will report its second quarter earnings after the closing bell next Wednesday, setting up what will be the AI hype cycle’s biggest test yet.

During this AI gold rush, companies around the world looking to profit have turned to Nvidia’s graphics processors to power new AI software and platforms.

Currently, tech firms of all sizes are doing everything they can to get their hands on Nvidia chips. During Tesla’s (TSLA) Q2 earnings call, CEO Elon Musk told analysts that the automaker will take as many Nvidia graphics processors as the company can produce.

That kind of demand is also why Nvidia blew away Wall Street’s expectations for its Q2 guidance during its last earnings call. At the time, analysts were anticipating revenue of $7.2 billion, but Nvidia said it will bring in around $11 billion in the quarter — a 64% jump over a year ago — which Wall Street analysts now expect next week.

The Street also expects earnings of $2.07 per share, a 306% year-over-year increase. Nvidia is used to enormous numbers, but these are putting high expectations on next week’s report, and the stock is already rising.

Jensen Huang, CEO of NVIDIA, speaks during a press conference at the Computex 2023 in Taipei on May 30, 2023. (Photo by Sam Yeh / AFP) (Photo by SAM YEH/AFP via Getty Images)
Jensen Huang, CEO of NVIDIA, speaks during a press conference at the Computex 2023 in Taipei on May 30, 2023. (Photo by Sam Yeh / AFP) (Sam Yeh/AFP via Getty Images)

“What Nvidia reports in its upcoming earnings release is going to be a barometer for the whole AI hype,” explained Forrester analyst Glenn O’Donnell. “I anticipate that the results are going to look really outstanding because demand is so high, and that means Nvidia is able to command even higher margins than it would otherwise.”

But those sky-high expectations mean if the company doesn’t deliver, it could put a serious damper on the AI explosion and send a shock through AI trades ranging from Microsoft and Google to Meta and AMD.

Wall Street is all-in on Nvidia

At the start of trading in New York on Tuesday, Nvidia’s stock hit $445. Year to date, shares of the company are up a staggering 204%. And Wall Street analysts are still upgrading the stock.

In a research note Tuesday, Aaron Rakers at Wells Fargo increased his price target on Nvidia from $450 to $500. Baird’s Tristan Gerra moved his price target on the stock from $475 to $570, adding that “AI demand is surging at all levels: individuals, enterprise, hyperscalers.”

Morgan Stanley’s Joseph Moore offered a similarly rosy view of the company, writing in a research note that “NVIDIA remains our Top Pick, with a backdrop of the massive shift in spending towards AI, and a fairly exceptional supply demand imbalance that should persist for the next several quarters; we think the recent selloff is a good entry point.”

UBS’s Timothy Arcuri also raised his price target on Nvidia, writing in a note that the company is “quite literally serving as ‘kingmaker’ as a huge wave of capital and new financing vehicles are chasing new AI software and specialized cloud infrastructure models.”

Nvidia is the preeminent maker of both the high-powered graphics chips needed to run AI programs and the software needed to develop those AI platforms. And the company has been preparing for this moment for years, researching and working on its AI capabilities well before Wall Street jumped into the AI craze with the launch of OpenAI’s ChatGPT generative AI platform in late 2022.

Since then Microsoft (MSFT), Google parent Alphabet (GOOG, GOOGL), Meta (META), Amazon (AMZN), Intel (INTC), AMD (AMD), and a cadre of AI-adjacent companies have positioned themselves as AI powerhouses.

Nvidia is mighty, but not invincible

While Nvidia is helping to drive the AI train, it’s facing a major problem at the moment. It simply can’t deliver as many chips as its customers want.

Taiwan Semiconductor Manufacturing Company (TSM) is Nvidia’s go-to for building its chips, but the manufacturer’s capacity is stretched as orders continue to pile in from Nvidia. According to Arcuri’s note, the recent demand spikes have pushed lead times for Nvidia’s critical H100 chips to six to nine months.

During Tesla’s earnings call Musk said Nvidia has too many customers vying for its products. And while the company has prioritized some of Tesla’s orders, Nvidia can’t provide as many chips as the electric automaker requires. As a result, Tesla is building its own supercomputer using its own AI chips to meet its needs.

Nvidia isn’t just facing increased lead times for its AI products, but it’s also looking to keep competitors Intel and AMD off its back. While the company has built up a lead thanks to its early investments in AI, the semiconductor business is notoriously competitive, and, as Intel has shown, no industry lead is safe.

“Nvidia is not invincible,” O’Donnell said. “Other companies like AMD and Intel and so on could come along and will come along and steal some of that share. But Nvidia has so much momentum right now that it is going to be hard to stop them. Not impossible, but hard.”

Now we just have to see what Nvidia has up its sleeve when it reports its earnings on Aug. 23.

Daniel Howley is the tech editor at Yahoo Finance. Follow him @DanielHowley.

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