Is Nvidia an Offer You Can’t Refuse?

The S&P 500 slid for a third consecutive week. Many analysts and investors are looking to the sky for clearing clouds.

Well, there may be no more likely hero for the markets than Nvidia (NVDA), which is set to report its second quarter earnings after close today.

Up roughly 200% year to date. The chipmaker is the first of its kind to reach a $1-trillion market cap.

Artificial intelligence (AI) has carried the market so far in 2023. Nvidia carries the AI crown.

Suffice to say, expectations are high


That’s not a surprise, in and of itself. Back in May, the company’s 64% quarterly revenue leap blew Wall Street away.

Now, “beat-and-raise” results are almost the unanimous expectation this afternoon.

Meanwhile, at least a dozen analysts raised their price targets for Nvidia within the past week.

The questions du jour are: Have expectations exceeded reality? And is Nvidia set to send the market tumbling?

Running of the Bulls

Analysts are calling for Nvidia’s earnings per share (EPS) and revenue to soar to record levels for the second quarter.

As I’ve already mentioned, the chipmaker shattered expectations last quarter. But what level of shattering will suffice to be deemed impressive this time around?

Those are lingering questions in a climate where you’d struggle to find a Nvidia bear.

And who can blame them?

Shares have tripled in 2023 en route to fattening its valuation by $700 billion.

And there are no signs AI adoption is slowing anytime soon.

The only question that needs no answer is: Who leads the industry? Nvidia.

Of course, the entire market's dependent on AI momentum. That narrows our focus on the dire importance of this one company.

“I’ve been covering tech since 1994, and I have never seen an environment where you are so dependent on one company to deliver,” GP Bullhound partner Inge Heydorn told Reuters. “… If Nvidia shows weakness, we could be in for quite a substantial correction in the market.”

But here’s the key number to keep in mind this evening:


That's how many times in the past two years Nvidia forecasted revenue below expectations.

So, we can see why bulls outnumber bears on Nvidia.

And given the state of the global economy with the push for AI, that doesn’t figure to change this quarter…

A Good Problem to Have

Here’s a lesson from Economics 101:

Price equilibrium occurs when supply and demand meet.

For Nvidia, that’s not currently possible.

The company can presently only meet half of the demand for its landmark H100 chips. This shortage has triggered their price to skyrocket to approximately $40,000 per unit.

In total, Nvidia supplies over 70% of the world’s AI chips. And it has an even stronger foothold in training generative AI models.

“Customers will wait 18 months to buy an Nvidia system rather than buy an available, off-the-shelf chip from either a startup or another competitor,” Futurum Group analyst Daniel Newman told the New York Times.

In that same piece, Mustafa Suleyman – CEO of AI startup Inflection AI, which recently received $1.3 billion of funding from Nvidia and others – lamented the reality of the chip market and lack of viable alternatives…

“None of them come close.”

Speaking of demand, the company got a recent boost from a $5-billion purchase for its chips from a bevy of Chinese tech giants

Given that the majority of Chinese AI companies are still training their models, the need for Nvidia’s chips is even greater.

But I’d say it’s fair to wonder, how much would China spend if there weren't fears about U.S. export curbs?

So Nvidia’s results are bound to look particularly impressive. But the amount that carries over after (or if) the U.S. puts those measures in place remains unseen.

But still…

Nobody’s Budging

UBS is firmly an Nvidia bull. It increased its price target for shares from $475 to $540.

And at least 12 other analysts raised their targets as well.

But UBS laid out particularly favorable projections for the chipmaker through 2025.

It expects Nvidia’s revenue to grow from $26.974 billion in 2023 to $61.439 billion in 2025, with adjusted diluted EPS surging from $3.34 to $12.08.

That’s a 261.7% increase.

But there's one distinction with Nvidia that's not ideal...

Shares currently sport the highest price-to-sales ratio of the entire S&P 500. Of the 99 companies to hold this distinction since the 1960s, tech stocks accounted for 27%.

And let me tell you… history wasn’t exactly kind to those companies over the long term.

They saw their average price rise 12% in the year following their crowning. Then things go downhill… fast.

In the three years that followed, they averaged a 4% annual drop. Compare that to the broader market's average 9% rise and those darlings had turned to laggards.

Not to mention, five years after that, they fell an average of 2% compared to the market's 10% move higher.

But let’s not kid ourselves… How many of those companies were at the wheel of as revolutionary a technological development as AI?

The Crown is Earned

Nvidia commands such a pronounced percentage of the market due to its fearless business model.

Competitors are almost wholly focused on chips.

But Nvidia not only excels at making those, it also sells computers, software, cloud services, and trained AI models.

“Unlike any other chip company, they have been willing to openly compete with their customers,” Cerebras chief executive Andrew Feldman told the New York Times.

And part of the company’s dominance is tied to its perpetually nimble approach, always prepared for its competitors’ next moves while pushing boundaries internally.

Advanced Micro Devices (AMD) is one such competitor. Some tout its M1300X chip as performing better than Nvidia’s H100 for half the price.

“Somebody like Meta or Google may want to look at lowering their cost,” Piper Sandler stock analyst Harsh Kumar told Reuters.

But AMD’s software pales in comparison to Nvidia’s proprietary CUDA platform. And Nvidia's GH200, set to release Q2 2024, is reportedly 48X as powerful as its predecessor.

there’s little belief that AMD is competing for anything more than AI's silver medal.

It's clear plenty of people are betting on Nvidia's continued dominance.

Hedge-fund manager (and Carolina Panthers owner) David Tepper boosted his Nvidia stake by 580% last week. It cost him a cool $450 million.

Nvidia’s “beat-and-raise” expectations could fall short. But that likely won’t stop anyone from buying for the long term.

If anything, they’d celebrate any momentary dip as an excuse to buy.

Until then,

Kyle Ottenheimer