When Nvidia releases its earnings on Wednesday, Wall Street's enormous bets on artificial intelligence will be decided. Investors are looking for indications that bubble concerns are unfounded.
Investors are becoming more concerned that the AI boom has outpaced fundamentals three years after ChatGPT's launch. Circular deals, in which one partner supports another's income, have been seen by some company executives to increase the danger of a bubble.
Fears of an impending market selloff have been heightened by a few big investors selling down a portion of their AI holdings. Both SoftBank CEO Masayoshi Son and tech billionaire Peter Thiel's hedge fund sold all of their shares in Nvidia in the third quarter, but they invested the profits in a huge wager on OpenAI.
After rising 1,200% over the previous three years, doubts have caused Nvidia shares to drop 7.9% so far in November. This month, the whole market has decreased by 2.5%.
According to Brian Stutland, chief investment officer of Nvidia investor Equity Armor Investments, "Nvidia earnings become more important with every quarter that goes by in terms of clarification on where AI is moving and how much spending is being done."
Despite concerns about a bubble, Nvidia's processors are still in high demand, with cloud behemoths like Microsoft pouring billions in AI data centers.
According to data provided by LSEG, Nvidia is expected to announce a more than 56% increase in its fiscal August-October quarter revenue to $54.92 billion, a far cry from the triple digit growth it saw for many quarters as it faces more difficult comparisons.
Although the delta has decreased, the company has exceeded forecasts for the last 12 quarters. Jensen Huang, CEO of Nvidia, stated last month that the business has $500 billion in reservations for its cutting-edge chips until 2026.
"The old Wall Street adage one stock does not a market make that would be incorrect here," stated Neil Azous, portfolio manager of the actively managed Monopoly ETF, which owns shares of Nvidia. "Nvidia has the ability to make a market."
However, "Big Short" investor Michael Burry's wager against the company revolves around Nvidia's processors. Burry, who recently closed his hedge fund, said that big cloud providers were inflating profits by prolonging the depreciable life of AI computing equipment, such Nvidia's chips.
Even though the resale market is booming, Nvidia now changes processors every year, making older versions seem outdated more quickly.
Nvidia is now having trouble producing enough processors. While Nvidia is introducing more sophisticated and larger systems that combine graphics processors, central processing units, networking equipment, and a variety of cooling options, contract chipmaker TSMC is adding advanced packaging capacity to overcome a major bottleneck and intends to continue growing through 2026.
This has strained profitability, along with the continuous ramp up of its premium Blackwell chips and future Rubin CPUs. It is anticipated that Nvidia will reveal that its adjusted gross margin decreased by about two percentage points to 73.6% in the third quarter compared to the same period last year. To $29.54 billion, net income probably increased by 53%.
Investors are keeping an eye on how major AI transactions, such as Nvidia's $5 billion share in chipmaker Intel and $100 billion investment in OpenAI, could impact its balance sheet. As of July 27, Nvidia has $11.64 billion in cash and cash equivalents.
Another overhang is China. Despite rumors of a potential deal for a scaled down version, Huang has stated that there are "no active discussions" on selling Blackwell in the market, and Nvidia is unable to ship its most sophisticated chips there because to U.S. export restrictions. Last quarter, Nvidia removed China from its advanced processor prediction.
