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Nvidia stock has more than doubled this year. Can earnings justify the AI hype?

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Nvidia Corp. shares have more than doubled this year as artificial intelligence captured the imagination of mainstream investors, but financial results arriving this week may not do much to justify the price, with analysts expecting more out of the forecast.

Nvidia NVDA, -1.57% is scheduled to report fiscal first-quarter earnings after the close of markets on Wednesday. Expectations are for strong year-over-year declines: Sales are expected to drop more than 21%, adjusted earnings are projected to fall by nearly a third on a per-share basis, and the core gaming-chip division is expecting revenue to be nearly halved.

Analysts, though, roundly expect Nvidia to beat those expectations on strong data-center sales, and then to guide targets higher as orders pour in for gear needed to develop the types of machine learning that tech companies have been hyping in 2023. Expectations for a “beat and raise” quarter follow a March developers conference that focused on AI opportunities and led Chief Executive Jensen Huang to project big financial returns over the next year, and analysts expect to see actual forecasts reflect that optimism.

Read: Nvidia CEO expects AI revenue to grow from ‘tiny, tiny, tiny’ to ‘quite large’ in the next 12 months

Susquehanna Financial analyst Christopher Rolland said the “AI arms races” should drive a “constructive” outlook in data-center sales. Rolland, who has a positive rating and a $350 price target on Nvidia stock, pointed out that Microsoft Corp. MSFT, -1.84% — one of the biggest names in generative AI thanks to its investment in OpenAI and its use of ChatGPT — is just one of Nvidia’s customers looking to spend.

“Overall, we expect better results/guidance, driven largely by the ongoing AI gold rush and subsequent data-center GPU demand,” Rolland wrote. “Microsoft continues to invest in OpenAI and ChatGPT and even called out Nvidia as a partner on their latest earnings call.”

From Microsoft’s earnings call: Nvidia’s stock gains as Microsoft details plans to spend on AI infrastructure

It was noteworthy that the number of Azure OpenAI customers has soared by 10 times quarter over quarter and that Microsoft is “increasing capex sequentially to scale their AI infrastructure,” Rolland wrote, adding that other Big Tech firms such as Meta Platforms Inc. META, -0.64% and Amazon.com Inc. AMZN, -0.02% also continue to invest in AI infrastructure.

The growth of AI products is expected to benefit chip makers. Cloud-service providers, or “hyperscalers” — like Microsoft’s Azure, Amazon’s AWS, Alphabet Inc.’s GOOGL, -1.99% GOOG, -2.05% Google Cloud and Oracle Corp.’s ORCL, -3.17% Cloud Infrastructure — use chips provided by the likes of Nvidia, Advanced Micro Devices Inc. AMD, +0.11% and Intel Corp. INTC, -2.54% to build the data centers that are used to process enormous AI workloads.

“We believe everyone is all-in on AI,” Evercore ISI analyst C.J. Muse said.

“We look for commentary supportive of our thesis that we are at a tipping point of a huge monetization event with AI — specifically Large Language Models (LLM), Generative AI and accelerated adoption of transformer technology which will drive meaningful training and inference demand for Nvidia products,” Muse said.

Read: Nvidia launches new AI platforms, with Google Cloud as an early adopter

On Monday, Wedbush analyst Matt Bryson said the question will be “the magnitude and nature of upside” that Nvidia will realize, as data center has only strengthened through early 2023, and February and March checks show pickup.

That’s because “Nvidia represents one of the best positioned companies in semis this year given … its dominant positioning in generative AI” and “multiple new product cycles across both data center (H100) and gaming (RTX40).”

On Monday, KeyBanc analyst John Vinh, who has an overweight price target and a $375 price target, voiced some concerns about Nvidia’s ability to build enough product and demand for gaming chips but still said he’s looking for a beat-and-raise quarter.

“While supply is likely to limit more meaningful near-term upside for Nvidia data-center GPUs including both the A100 and H100, and the disappointing launch of the RTX4070 could result in a modest miss in gaming, we anticipate investors will look through these concerns,” Vinh wrote.

See also: ServiceNow, Nvidia team up on generative AI

For the quarter ending in April, analysts surveyed by FactSet expect Nvidia to report adjusted fiscal first-quarter earnings of 92 cents on revenue of $6.53 billion, down from last year’s $1.36 a share on revenue of $8.29 billion. Analysts expect gaming sales of $1.97 billion — nearly half of last year’s $3.62 billion — and data-center sales of $3.9 billion, a 4% increase from a year ago.

The most important numbers could be executives’ guidance for the fiscal second quarter. Analysts expect second-quarter earnings of $1.07 a share on revenue of $7.17 billion, with $4.29 billion from data center and $2.13 billion from gaming. Nvidia just announced its new line of RTX 4060 cards.

Of the 47 analysts surveyed by FactSet, 35 have buy ratings and 12 have hold ratings; Nvidia has lacked a sell rating since April. The average price target as of Monday was $296.70, more than 5% lower than the going price for Nvidia shares.

Nvidia shares are up more than 110% year to date, while the PHLX Semiconductor Index SOX, -1.17% has advanced more than 26% this year and the tech-heavy Nasdaq Composite Index COMP, -1.26% has seen a 21% rise. Meanwhile, the Dow Jones Industrial Average DJIA, -0.69% , which counts IBM IBM, +0.53% , Intel and Microsoft among its 30 components, is up 0.4%, and the S&P 500 SPX, -1.12% has advanced 9%.

From April 2022: The end of one-chip wonders: Why Nvidia, Intel and AMD’s valuations have experienced massive upheaval

GPT’s reaction to this article:

The article discusses the upcoming financial results of Nvidia Corp. and the expectations of analysts. While sales and earnings are expected to decline year-over-year, analysts anticipate that strong data-center sales will result in Nvidia beating expectations and guiding targets higher. The growth of AI products is expected to benefit chip makers like Nvidia, as cloud-service providers use their chips to build data centers for processing AI workloads. The article also notes concerns about Nvidia’s ability to build enough product and demand for gaming chips, but overall, analysts expect a positive “beat and raise” quarter.

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