The company’s revenue forecast, nearly double Wall Street’s estimate, showed that the starting gun had been fired in a race to develop AI that would add more than $3.5 trillion in value to Nvidia stock over the next 2½ years. It also helped lift the Nasdaq Composite more than 88% to the record it reached in late October.
Next week’s update, scheduled for after the market closes on Wednesday, might be just as transformative.
Skepticism about the AI trade is higher now than at any point since before Nvidia’s 2023 forecast. Investors are both questioning the returns from the billions of dollars tech companies have spent to stake their claims in the new technology land grab and growing concerned over when that investment is likely to meaningfully boost profitability.
Stocks are showing the effects. Meta Platforms, in fact, has fallen nearly 20% since unveiling a mixed set of third-quarter earnings on Oct. 28. Management unveiled a big step up in AI spending and vowed to increase that tally “notably” over the coming year.
An index of the so-called Magnificent Seven tech companies has fallen around 5.8% since Meta’s update. Nvidia has fallen more than 8.1%. The S&P 500, meanwhile, is on pace for one of its worst November performances since 2008.
Companies such as Oracle and CoreWeave, both of which rely on leasing their AI data centers, have been punished in both the equity and credit markets for quickly increasing their overall borrowing to snare lower-margin business.
“Nvidia is facing the tough task of meeting both high earnings expectations and high skepticism around AI capex, likely only resolved when broader market volatility subsides,” said Bank of America analyst Vivek Arya.
Nvidia’s role in the AI investment boom is, of course, very different from those of companies offering artificial-intelligence services or trying to build up infrastructure. Its revenue model isn’t in question, it carries a double-A credit rating, the second highest on the scale, and it is expected to comfortably generate more than $70 billion in net income this year alone.
That means what it has to say about AI demand could be especially valuable. The company isn’t trying to win in AI—it already has—and that success gives it a panoramic view of what its customers are up to.
CEO Jensen Huang has already hinted that he could sell around $500 billion worth of his Blackwell chips, as well as a soon-to-be launched version called Rubin, by the end of next year.
Supply constraints likely make that an impossible tally to reach, but it suggests that Huang, whom Wall Street affords an unusual amount of trust, isn’t worried about demand.
“I think we’re probably the first technology company in history to have visibility into half a trillion dollars of cumulative Blackwell and early ramps of Rubin through 2026,” Huang said during a Nvidia-led tech event in Washington, D.C., last month.
He may need to offer an even more positive view, however, to boost Nvidia stock and restore confidence in the AI trade. Investors aren’t convinced that the White House will allow Nvidia to sell its next generation chips in China. A separate worry is that demand growth might slow if some of Nvidia’s biggest hyperscaler customers either pare back their plans for data-center capacity or opt for cheaper solutions from rivals such as Advanced Micro Devices.
That could be why options traders are pricing in an after-earnings swing of around 6.2%, in either direction, for Nvidia stock. That is the biggest forecast move in more than a year.
Wedbush analyst Dan Ives, however, remains confident that Nvidia’s outlook can soothe market jitters and quiet some of the “AI bubble talk”.
“Nvidia’s earnings next week will be another major validation moment for the AI Revolution and a positive catalyst for tech stocks into year-end as investors continue to underestimate the scale and scope of AI spend,” he said in a note published Friday.
However, Gene Munster, managing partner at Deepwater Asset Management, has a slightly different take. Munster is bullish on Nvidia stock, and the AI revolution in general, but isn’t sure investors will be reassured.
“The cross currents around next week’s earnings set up a Catch-22 for the AI complex,” he said in a recent earnings preview. “Stronger guidance can amplify worries about overspending, while a modest raise can be read as the first sign that growth is normalizing faster than expected.”
“It’s a coin toss as to how investors will react to favorable guidance,” he said.
Investors might need better odds than that to power tech stocks, and the broader market, higher into the end of the year.
Write to Martin Baccardax at martin.baccardax@barrons.com