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

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Nvidia (NVDA) will report its second-quarter earnings after the closing bell next Wednesday, marking the biggest test of the AI hype cycle yet.

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

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

This kind of demand is also why Nvidia dismantled Wall Street’s forecast for its guidance for the second quarter during its latest earnings call. At the time, analysts were expecting $7.2 billion in revenue, but Nvidia said it would make about $11 billion in the quarter — a 64% jump from a year ago — which Wall Street analysts now expect next week.

The Street also expects earnings of $2.07 per share, up 306% year-over-year. Nvidia’s used to huge numbers, but those numbers set high expectations for next week’s report, and the stock is already soaring.

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

“What Nvidia announces in its next earnings release will be a measure of all the AI noise,” explained Forrester analyst Glenn O’Donnell. “I expect the results are going to look really great because the demand is so high, and that means Nvidia is able to command higher margins than it would have otherwise.”

But those high expectations mean that if the company doesn’t deliver, it could seriously dampen the AI explosion and cause a shockwave through AI deals ranging from Microsoft and Google to Meta and AMD.

Wall Street all in Nvidia

In early New York trading on Tuesday, Nvidia stock reached $445. Year-to-date, the company’s shares are up a staggering 204%. Wall Street analysts are still bullish on the stock.

In a research note Tuesday, Wells Fargo’s Aaron Rackers increased his price target on Nvidia from $450 to $500. Baird’s Tristan Gera shifted his target for the stock from $475 to $570, adding that “the demand for AI is rising at all levels: individuals, organizations, and hypers.”

Morgan Stanley’s Joseph Moore offers a similarly rosy view of the company, writing in a research note that “NVIDIA remains our top pick, against the backdrop of a massive shift in spending toward AI, and an exceptional supply-demand imbalance that should persist into the next several quarters.” The recent sell-off is a good entry point.”

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

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

Since then, Microsoft (MSFT), Alphabet Corporation (GOOG, GOOGL), Meta (META), Amazon (AMZN), Intel (INTC), AMD (AMD), and a cadre of AI neighbors have positioned themselves as strong centers of artificial intelligence.

Nvidia is the mighty, but it’s not unrivaled

While Nvidia is helping lead the AI train, it’s in big trouble right now. They simply can’t offer as many chips as their customers want.

Taiwan Semiconductor Manufacturing Company (TSM) is Nvidia’s go-to for building its chips, but the manufacturer’s capacity is growing as orders continue to pile up from Nvidia. As Arcuri notes, recent demand surges have pushed the lead time for Nvidia’s critical H100 chips to six to nine months.

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

Not only is Nvidia facing increasing lead times for its AI products, it’s also looking to keep competitors Intel and AMD off its back. While the company has taken the lead thanks to its early investments in artificial intelligence, the semiconductor business is notoriously competitive, and as Intel has shown, no industry leader is safe.

“Nvidia is invincible,” O’Donnell said. Other companies like AMD, Intel, etc. can come in and steal some of this share. But Nvidia has so much momentum right now that it will be hard to stop. It’s not impossible, but it’s hard.”

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

Daniel Holly He is the Technical Editor at Yahoo Finance. follow him @employee.

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