Earnings Outlook: Nvidia's Upcoming Earnings Set to Challenge Stock Market's AI Aspirations

Analysts Notebook joined discussion · Feb 19 05:29

$NVIDIA(NVDA.US)$ is set to report earnings for its fiscal fourth quarter of 2024 on Wednesday, Feb. 21, and expectations are high for the chipmaker stock that's already up more than 300% over the past 12 months. Markets also face significant implications. Nvidia, having recently overtaken $Alphabet-A(GOOGL.US)$ in market value, now stands as the third largest publicly traded company in the United States, playing a key role in driving the $S&P 500 Index(.SPX.US)$'s advances. The AI chip manufacturer has experienced a surge of over 45% this year, outpacing the broader index's increase of approximately 5%.

Here are key expectations to watch:

Earnings Outlook: Nvidia's Upcoming Earnings Set to Challenge Stock Market's AI Aspirations

Currently holding the position as the third most valuable entity on Wall Street, following $Apple(AAPL.US)$ and $Microsoft(MSFT.US)$, Nvidia has established itself as a leading indicator for the artificial intelligence sector. In tandem, stocks of other companies with a focus on AI have experienced significant gains this year, with $Super Micro Computer(SMCI.US)$ seeing a rise of 182% year-to-date, and $Arm Holdings(ARM.US)$ enjoying an increase close to 71%. Overall, investors have their highest allocation to the tech sector since August 2020, according to fund managers in the latest survey conducted by BofA Global Research.

Data Center Business

In November, Nvidia's third-quarter profits soared beyond expectations, propelled by an expansion in the company's data center division that provides cloud and AI solutions. This segment achieved an all-time high, generating $14.51 billion in revenue during the third quarter.

Projections aggregated by Visible Alpha suggest that the data center might generate $16.86 billion in revenue for the fourth quarter. This figure would represent a more than fourfold increase from the revenue Nvidia recorded in the corresponding quarter of the previous year.

Source: Investopedia

New Custom Chip Unit Plans

Shares of Nvidia recently reached a peak after announcements that the chipmaker intends to establish a new division dedicated to bespoke chips.

During the earnings call, the company may offer additional insights into this nascent division. This strategic move has the potential to enable Nvidia to secure a share of the burgeoning market for custom chips, bolstering its status as the most valuable chip company globally during the surge in AI technology.

Analysts' Opinions

• Loop Capital analyst Ananda Baruah initiated coverage of Nvidia stock with a buy rating and 1,200 price target.

We are at the front end of a 3-5 year GPU compute and Gen AI foundational build across hyperscale" service providers, Baruah said in a client note. "Our work suggests Nvidia's largest customers will be taking everything Nvidia can give them in 2024 and 2025."

• BofA Securities analyst Vivek Arya on Thursday reiterated his buy rating on Nvidia stock with a price target of 800.

I wouldn't be surprised to see Nvidia stock pull back after its earnings given the recent parabolic run-up in the stock. Any potential mismatch versus bullish expectations is likely supply (memory, packaging) rather than demand or competition related," Arya said in a client note.

• "It could be the most important earnings in all tech year to date, and possibly the entire stock market," Jordan Klein, managing director for tech, media and telecom sector trading at Mizuho Securities, said in a client note. "Nvidia is not up 47% year to date to $1.8 trillion market cap because nobody cares, right?"

• "When people say that the market is doing well this year, they really mean that tech is doing well, and Nvidia is at the core of that," said Keith Lerner, chief market strategist at Truist Advisory Services.

There is excitement within AI and if that optimism is not fulfilled by earnings then you could see that reverberate quickly and weigh on sentiment."

• Given the company's size and its importance to the AI story, Nvidia's results could be pivotal for market sentiment, said Kevin Landis, a portfolio manager at Firsthand Capital.

Every time you get a big stock market rally there's a favorite stock that leads it," said Landis, who regrets selling his shares in Nvidia last year. "It's hard not to look at Nvidia and see … that's driving the psychology of the overall market."

• A disappointing report from Nvidia could also exacerbate concerns over crowding in the market's largest stocks, said Michael Purves, head of Tallbacken Capital Advisors.