Nvidia's Q2 Sales Expected to Double, But Even a Slight Miss Could Impact Stock Prices

3 weeks ago

Nvidia is anticipated to report a significant increase in its second-quarter revenue, likely more than doubling from the previous year. Despite this impressive growth, investors accustomed to the company's exceptional performance are expecting even more from the leading AI chipmaker.

As Nvidia (NVDA.O) prepares to release its earnings for the May-July period, any deviation from Wall Street's expectations could either boost or dampen the ongoing AI-driven market rally. The company's stock has already soared over 150% this year, contributing $1.82 trillion to its market capitalization and propelling the S&P 500 to new highs.

Currently, Nvidia's stock is valued at approximately 37 times its forward earnings, compared to the average of around 29 for the top six tech companies on the S&P 500 index, which includes Nvidia.

Tech giants like Microsoft are heavily investing in AI infrastructure and have been purchasing Nvidia's powerful graphic processing units, which are crucial for handling large-scale computing tasks in modern data centers. This demand has significantly bolstered Nvidia's financial standing.

According to data from August 23, Nvidia's second-quarter revenue is expected to have increased by about 112% year-over-year, reaching $28.68 billion. However, the company's adjusted gross margin may have dropped by more than 3 percentage points to 75.8% due to the costs associated with ramping up production to meet rising demand.

"Nvidia isn't just a benchmark for chips; it's a benchmark for AI as a whole," said Daniel Morgan, senior portfolio manager at Synovus Trust, which holds shares in major U.S. tech firms, including Nvidia. "If Nvidia misses expectations, investors might start selling off other AI-related companies."

Concerns have arisen among some investors regarding Nvidia's ability to meet these high expectations, particularly given the significant spending on AI by its largest customers. These concerns led to a 20% decline in Nvidia's stock in July and early August, though a recent rebound has brought the stock to within 5% of its June record high.

Potential production delays of Nvidia's next-generation Blackwell AI chips could also pose a challenge. CEO Jensen Huang previously stated that these chips would be available in the second quarter, but analysts have highlighted potential design issues that could delay their release.

Research group SemiAnalysis has suggested that revenue growth might slow in the first half of next year if these delays occur. Additionally, Nvidia's profit margins could be squeezed if its chip contractor, TSMC, decides to increase its fees, as the Taiwanese company has hinted.

Looking ahead, Nvidia is expected to forecast a 75% increase in third-quarter revenue to $31.69 billion, which would mark the end of its five-quarter streak of triple-digit growth. This comes after Nvidia's growth exceeded 200% in the past three quarters.

"We're reaching the law of large numbers here; once a company reaches a certain size, maintaining the same growth rate becomes nearly impossible," said Michael Schulman, chief investment officer at Running Point Capital.

Despite the potential delay in Blackwell chips, some analysts believe Nvidia could mitigate the impact by offering its previous generation Hopper chips. While not as powerful or profitable as Blackwell, the Hopper processors are still suitable for most AI-related applications.

Investors will also be closely watching for updates on Nvidia's AI processors for the Chinese market, where sales of its most advanced chips are restricted by the U.S. government. Nvidia's China-focused processors, reportedly named H20, could help the company gain ground in this key market, where Huawei has emerged as a strong competitor.

Moreover, Nvidia is facing growing antitrust scrutiny in the U.S., with regulators investigating whether the company has pressured cloud providers to purchase multiple products or bundled its networking equipment with its popular AI chips.