Nvidia Stock Could Pop To Record If Q2 Earnings Report Is Boffo

Nvidia’s shares have lost 26% of their value since peaking at nearly $141 in June.

Why has the stock fallen so far in the last two months? Are Nvidia’s shares a bargain? My thoughts: I am not sure why the stock fell and the shares could soar August 28 if Nvidia reports expectations-beating second quarter sales and earnings growth and raises its guidance.

Nvidia stock could be getting dragged down by news reports including:

• SuperMicro’s disappointing margins — which sent the company’s stock down 20%, noted Yahoo! Finance. That decline seemingly ignored the company’s expectations-beating forecast of $30 billion in revenue in the next year.
• A possible delay in the launch of Nvidia’s new Blackwell chip due to a design flaw, reported by The Information. Nvidia confirmed the company expects Blackwell production to ramp up in the second half of 2024.

It is even possible hedge funds — seeking to raise capital on August 5 to cover margin calls on their underwater carry trades — might have taken gains on their Nvidia holdings, The Economist suggested.

Here are the reasons Nvidia stock could rise:

• Track record of significantly exceeding growth expectations.
• Large capital expenditure increases planned by big Nvidia customers.
• Nvidia’s leading market share and rapid pace of innovation.

Nvidia’s Expectations-Beating Growth

Companies generally enjoy an increase in their stock prices if they report better than expected growth in revenue and earnings and raise their forecast each quarter.

Nvidia has blown through analysts’ expectations since the second quarter of 2023. That trend is likely to continue when the company releases its second quarter report for fiscal 2025 — for the July 2024-ending quarter.

Since the July 2023-ending quarter, here are the percentages by which Nvidia exceeded analysts’ earnings per share expectations, according to Nasdaq:

• July 2023 earnings surprise: 38.89%
• October 2023 earnings surprise: 26.67%
• January 2024 earnings surprise: 16.67%
• April 2024 earnings surprise: 13.73%

For the July 2024-ending quarter, expectations are high.

Analysts estimate Nvidia will report earnings per share of $0.59 — a 136% increase from the previous year, according to Barchart. On May 22, Nvidia forecast 197% revenue growth for fiscal 2025’s Q2 — exceeding analysts’ expectations, noted the Wall Street Journal.

Strong AI spending should help Nvidia make its own ambitious targets for data center revenue. Analysts expect Nvidia to report $25 billion in data center revenue for the July quarter — roughly unchanged from a year ago, the Journal reported.

The performance of Nvidia’s stock could hinge on whether the company exceeds that target and raises guidance. Since the magnitude of Nvidia’s earnings surprises have steadily declined in the previous four quarters, the AI chip designer’s Q2 surprise could be lower than the first quarter 2024 result was.

Nvidia Customers Plans To Boost GPU Spending

Alphabet, Microsoft, Meta, and Amazon — which together account for 40% of Nvidia’s revenue, according to Bloomberg — plan to continue spending heavily on AI-related infrastructure.

Therefore, growth in demand for Nvidia’s graphics processing units — widely used to train and operate the large language models that power generative AI — could remain strong.

These cloud services providers — that boosted by 64% their second quarter capital expenditures to $58.5 billion, according to the Journal — say they would rather invest too much in generative AI than too little.

Here is how that breaks down by company:

• Alphabet. In the company’s second quarter 2024 earnings report, CFO Ruth Porat said future capital expenditures will be “at or above the Q1 level of $12 billion,” according to the Q2 investor conference call. The “risk of under-investing is dramatically greater than the risk of over-investing for us here,” CEO Sundar Pichai told investors.
• Microsoft. “To meet the growing demand signal for our AI and cloud projects, we will scale our infrastructure investments with FY ’25 capital expenditures expected to be higher than FY ’24,” Microsoft CFO Amy Hood told investors in a July 30 conference call.
• Meta. We “currently expect significant capex growth in 2025 as we invest to support our AI research and our product development efforts,” Meta CFO Susan Li stated in the company’s July 23 second quarter earnings call.
• Amazon. We “expect capital investments to be higher in the second half of the year.” CFO Brian Olsavsky told investors on August 1 in a second quarter investor conference call. “The majority of the spend will be to support the growing need for AWS infrastructure as we continue to see strong demand in both generative AI and our non-generative AI workloads,” he added

Investors Are Nervous About Generative AI Investments

While this should be great news for Nvidia bulls, macroeconomic worries may be motivating some investors to sell the chip designer’s stock. “Nobody reduced numbers and said things are not working with AI or we’re taking a pause on AI,” Rhys Williams, chief strategist at Wayve Capital Management LLC, told Bloomberg. “It’s just that people are very nervous” about macroeconomic uncertainties, he added.

To be sure, investors are also impatient for companies to quantify the extent to which their generative AI investments are driving revenue and profit growth. “We haven’t yet seen a way to monetize AI, so the return on that spending is unclear,” said Srini Pajjuri, managing director and senior research analyst at Raymond James, according to Bloomberg. “The question is, how long can this continue?”

Contrary to Pajjuri’s contention, some companies are monetizing AI. For example, Meta reported faster-than-expected revenue growth in its digital advertising business for the second quarter. The reason? Meta’s generative AI ad platform matches ads more effectively to potential buyers of advertisers’ products, according to an August Forbes post.

Moreover, ServiceNow reported a bigger than expected backlog due to strong demand for the company’s generative AI-powered digital workflow services, noted a July Forbes post.

To be fair, given these companies’ failure to quantify how much revenue is attributable to generative AI, it is unclear whether the resulting profits are sufficient to offset the high cost of building and operating large language models.

However, two things are clear. First, unless companies invest, there is little chance they will be able to profit from generative AI before rivals do.

Second, there will be a time lag — potentially years — between when companies begin experimenting with generative AI and when a fraction of those experiments turn into new growth vectors, I argue in my new book, Brain Rush.

How Nvidia Stays In The Lead

Nvidia dominates the GPU market — with 88% share in the first quarter of 2024, according to Jon Peddie Research.

Many competitors are trying to win some of that GPU market share. Rivals include AI chips provided by Nvidia customers. These include Google’s Trillium custom AI accelerator, Microsoft’s Azure Maia, Meta’s custom AI chip — the Meta Training and Inference Accelerator — and Amazon’s Trainium and Inferentia chips, the companies said in their second quarter earnings calls.

Yet thanks to Nvidia’s CUDA software — that developers have been using for well over a decade — and a raft of partnerships about which I wrote in Brain Rush, the chip designer’s lead is difficult for these companies — and other rivals such as AMD and Intel — to surmount.

While Nvidia launched CUDA in 2007, the company has continuously adapted the library. More than five million developers at about 40,000 companies now use CUDA — which includes “more than 300 code libraries and 600 AI models, and supports 3,700 GPU-accelerated applications,” noted the Journal.

What’s more, Nvidia keeps creating the future of AI chips. Google and Nvidia’s other data center customers are lining up to take delivery of Nvidia’s state-of-the art Blackwell chips when they are available. CEO Jensen Huang said Blackwell would generate “a lot of revenue” for Nvidia in 2024 during a May investor call.

Given all the attention being paid to Nvidia, I expect its shares to move sharply on August 28. They will go up far should the company beat and raise. Otherwise, the chip designer’s stock is sure to plunge.