Investors Need Confirmation AI spending is Boosting Nvidia’s Earnings

The markets will focus on quarterly earnings results later today from Nvidia (NVDA) to see if the surge in the stock to a 17-month high last Thursday is warranted.  Nvidia has more than doubled in price this year due mainly to the frenzy surrounding artificial intelligence (AI), and investors will be scrutinizing the company’s earnings results for evidence that spending on AI is actually boosting sales. 

Nvidia’s semiconductors are used in computers powering AI applications and the company has emerged as one of the most popular ways for investors to gain exposure to the frenzy surrounding AI after the success of OpenAI’s ChatGPT.  As a result, Nvidia is the top performer in both the S&P 500 ($SPX) (SPY) and Nasdaq 100 ($IUXX) (QQQ) this year, even as economic headwinds increase and conditions in the core markets of personal computers and data centers remain tough.

Investors want to see evidence that AI-related demand is translating into enough revenue to justify the torrid rally in Nvidia’s stock price.  Attention in Nvidia’s earnings results will focus on the company’s data center business, which is the main provider of AI accelerator microchips.  According to Bloomberg data, Nvidia’s Q1 data center revenue is expected to be $3.9 billion, an increase of +4% from the same period a year ago.

Some analysts believe that stepped-up spending on components for AI computing might not show up until this quarter or later this year, making the company’s forward guidance a key factor for whether the AI surge is having a substantial impact.  According to Bank of America, Nvidia’s revenue forecast for Q2 is likely to top the consensus by about $200 million to $300 million thanks to AI-related demand.  That would be a positive sign after revenue estimates have barely moved so far this year.

Analyst projections for revenue in Nvidia’s current fiscal year have risen just +1.6% in the past six months.  The slight bump in revenue estimates and the recent surge in Nvidia’s stock price has boosted valuation to 61 times profits expected over the next 12 months, making the stock one of the most expensive in the Nasdaq 100, which has an average multiple of about 25 times.  Some analysts are comparing Nvidia’s elevated valuation to that of stocks in the dot-com bubble twenty years ago.  Miller Tabak said, “As we learned from 2000-2003, companies that are going to change the world still have valuation limits.”   

On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.