Chipmaker Nvidia, which shook off Tesla to become Wall Street’s most-traded stock, is set for a significant earnings report on Wednesday that will test investor euphoria about the potential of artificial intelligence (AI). The company’s fiscal second-quarter report and outlook are expected to grab the spotlight following an industrywide selloff that has exacerbated fears that technology stocks may be overvalued and profit growth slow.
The Santa Clara, California-based firm, which controls 80% of the market for AI chips, has seen its market value surge to $1.8 trillion, surpassing Alphabet, Google’s parent company, and Amazon, allowing it to dethrone Silicon Valley darling Tesla. Its ascent shows how fervent investors are betting on the disruptions AI could bring to sectors like health care, manufacturing, and financial services.
But the outsize representation of Nvidia in day-to-day trading could leave investors more vulnerable to disappointment in its results, which could puncture the tech rally and dampen broader market enthusiasm about the long-term prospects for stocks, strategists said. Nvidia revenue growth is expected to be a key focus of analysts, and anything short of an upside surprise could cause the stock to retreat after climbing more than 40% this year.
Nvidia’s outsized presence in trading highlights how much the market has come to rely on momentum-driven strategies involving stock picking and bets on future revenue growth, which can make the market more vulnerable to sudden shifts in investor sentiment. As evidence, Nvidia’s share price jumped by more than 34% last month after chip maker Super Micro Computer SMCI.O, another company benefiting from the boom in AI, said it was re-evaluating its partnership with Nvidia and reviewing other options.
Analysts expect Nvidia’s quarterly revenue to have jumped more than three-fold, reflecting surging demand for the company’s AI server chips that power many cloud computing applications. The company has also made big bets on hot AI startups like Cohere, Hugging Face, and CoreWeave, which could boost its top line over the longer term.
But investors are also concerned that Nvidia’s high profitability will eventually lead to lower profit margins and a shift away from its reliance on growth-driven trading strategies, said Ameriprise market strategist Anthony Saglimbene. He added that a slowdown in Nvidia’s growth pace could also force the company to reinvest its profits at a rate closer to the semiconductor industry average of 1.15 times sales. That would reduce reinvestment and lead to a faster rate of capital return, which could dampen investors’ euphoria about the company’s prospects for continuing to outperform the broader market. Nvidia will announce its quarterly results on Wednesday after the market closes. Analysts expect the chipmaker to deliver a blowout earnings report and forecast.
