Nvidia's Earnings on the Edge Amid DeepSeek Disruption and AI Bubble Woes

The upcoming release of Nvidia's anticipated fourth-quarter earnings report has captured market attention. Analyst Damir Tokic has highlighted that Nvidia's performance guidance may fall short due to the recent DeepSeek incident, increasing pressure on the artificial intelligence (AI) bubble. Next week, on February 26th, Nvidia will announce its earnings post-market close, with both high expectations and potential risks in play.

Over recent months, Nvidia's stock has shown volatile movement, especially after a drop in August 2024, and is now hovering around the $138 to $139 range. Tokic points out that Nvidia's stock is constrained at these levels for several reasons. First, its revenue growth has decelerated, dropping from a year-over-year rate of 265% at the start of 2024 to 93.61%, with gross profit growth also declining significantly. Although projected fourth-quarter revenue is up 72% year-over-year to $380.9 billion, this growth continues to slow in comparison to previous data.

Tokic had issued a bearish rating in June last year, arguing that Nvidia's valuation was overstretched, with its price-to-sales ratio still high at 30 times despite a decrease from 40 times in 2024. This valuation is particularly unreasonable given the slowing revenue growth. Although earnings might exceed market expectations, the performance guidance could be adversely affected by the DeepSeek incident, thereby influencing investor sentiment.

The technological advances of DeepSeek could have significant implications for the generative AI (GenAI) landscape. By utilizing Nvidia's relatively low-end chips, DeepSeek has developed a cost-effective large language model, indicating a reduced reliance on advanced chips. This development suggests a potential decline in capital expenditure in the GenAI field, consequently impacting Nvidia's sales and profitability.

Major U.S. tech companies such as Microsoft, Meta, and Alphabet are poised to reflect this shift in their upcoming earnings reports. However, they may not have fully adjusted their investment expectations due to time constraints. Tokic asserts that as DeepSeek's technology further infiltrates the market, capital expenditure in the GenAI sector will likely slow by 2025, affecting the broader ecosystem centered around Nvidia.

From a broader perspective, the AI bubble began to inflate following Nvidia's April 2023 earnings report, which revealed significant capital investments by hyperscale data center operators. Should these operators reduce capital spending, the AI bubble could burst swiftly. Tokic also notes that Federal Reserve Vice Chair Barr has cautioned about the possible overvaluation of the AI bubble, with industry skepticism about its actual worth increasing. This shift might affect market investors' confidence, subsequently impacting the stock market.

In summary, Nvidia is expected to encounter challenges in meeting performance guidance in its forthcoming earnings report. Coupled with the DeepSeek incident's impact, the potential burst of the GenAI bubble raises concerns. Investors should remain vigilant, considering possible downside risks in stock prices. Adjusting investment portfolios accordingly may be prudent, focusing on Nvidia's performance guidance and evolving market forecasts in the AI domain. A careful approach in risk management and asset allocation remains wise in an uncertain market climate.