Is The Market Aware of the Risks Behind Nvidia's Upcoming Earnings?

This Wednesday, AI giant Nvidia is set to release its highly anticipated financial report. Investors are eagerly looking forward to it, with high-performance expectations and hopes for the stock price to reach new heights.

The market widely expects that Nvidia's revenue for the second quarter will double year-on-year, reaching $28.68 billion. In the past few quarters, Nvidia's performance has continued to exceed expectations, with each quarter's revenue being about $1.5 billion higher than expected.

The key lies in whether Nvidia can live up to the market's high expectations. As a leader in the semiconductor industry, its performance directly affects the confidence and performance of the entire industry and even the broader market.

Daniel Morgan, Senior Portfolio Manager at Synovus Trust, said that Nvidia is not only a benchmark for the chip industry but also the entire artificial intelligence industry. If Nvidia fails to meet expectations, investors may sell all AI companies.

The options market has already booked high volatility, with Nvidia's implied stock price volatility reaching 10%. Since 2018, the stock has never fallen more than 8% on the day of the financial report, and Nvidia's market value is close to $3 trillion.

Expectations Remain High, with Yearly Revenue Doubling

According to data from the London Stock Exchange as of August 23, it is expected that Nvidia's second-quarter revenue will grow by about 112% year-on-year, reaching $28.68 billion. However, due to increased production costs caused by demand growth, its adjusted gross margin is expected to fall by more than 3 percentage points, from 78.8% in the previous quarter to 75.8%.

However, the market has always expected this AI leader to exceed expectations, not just meet them. Some investors are worried whether Nvidia can meet the high expectations this time.

Analysts expect that Nvidia's financial report will have an important impact on the AI sector on Thursday. If it exceeds Wall Street's expectations, it may further drive the rise of the AI sector; on the contrary, if it falls slightly short, it may impact the stock price.

At the same time, some analysts warn that as the scale expands, Nvidia's growth may slow down.

Nvidia's stock price has soared more than 150% this year, with a market value increase of $1.82 trillion, and has driven the S&P 500 index to a new high. Currently, Nvidia's price-to-earnings ratio is about 37 times, compared with an average price-to-earnings ratio of about 29 times for the Mag Seven.

Is the Market Underestimating the Potential Risk?

Bank of America analyst Gonzalo Asis warned in a recent report that the market may be underpricing the risk of disappointment, and the financial results may bring unexpected fluctuations.

According to Asis, Nvidia's implied stock price volatility is 10%, which means the stock price may fluctuate by 10% in either direction. Since 2018, the stock has never fallen more than 8% on the day of the report.

The volatility index (VIX) on August 5 was 65, highlighting the vulnerability of the broader market's return, and the S&P 500 index is often still vulnerable after such a big impact. Any adverse results from Nvidia's financial report may exacerbate market instability.

Since July, due to market concerns about whether huge AI expenditures can bring corresponding returns, AI industry chain stock prices have experienced a correction. Nvidia's stock price fell by 20% in most of July and early August. Although it has recently rebounded, the stock price is still about 5% lower than the historical high in June.

However, Goldman Sachs is more optimistic about Nvidia's current situation, expecting its Q2 revenue and earnings per share to reach $29.769 billion and $0.68, respectively, which are 4.1% and 5.9% higher than market expectations, and 11% higher than market expectations for earnings per share by 2025.

Will Blackwell Delay Start Exerting Its Influence?

The company's CEO, Jensen Huang, said in May that the chip would be shipped in the second quarter. However, analysts later pointed out that design obstacles might delay the shipment time.

Some analysts said that Nvidia could offset most of the impact of the delay of the Blackwell chip by replacing Blackwell chip orders with the previous generation Hopper chip. The functionality and profit of the Hopper series processors are not as good as Blackwell, but they are sufficient for most AI-related applications.

JPMorgan believes that the capacity increase of GB200 will slow down in the second half of 2024, but is expected to expand significantly in 2025. Although there will be production challenges at the beginning, it is expected that the GPU shipments related to Blackwell will still reach more than 4.5 million units in 2025. It is expected that TSMC's revenue will remain relatively stable.

Research firm SemiAnalysis said that if Nvidia's chip contractor TSMC raises fees, this means that Nvidia's revenue growth in the first half of next year may be impacted, and the gross margin may also be squeezed.

LSEG data shows that Nvidia's expected third-quarter revenue will grow by 75% to $31.69 billion, ending its five consecutive quarters of triple-digit growth, while the same period last year was quite strong, with the company's revenue soaring by about 206% to $18.12 billion.