Nvidia (NVDA) -) shares slipped lower Tuesday trading, after hitting a record high close last night, ahead of the AI chipmaker's highly anticipated third-quarter earnings report, slated for after the closing bell.
Nvidia, the first chipmaker to top the $1 trillion mark in market value following a blockbuster spring update that converted AI hype to tangible profit growth, is expected to report earnings rose nearly five-fold from a year earlier to $3.37 a share.
Group revenues are expected to rise nearly three-fold from last year to $16.2 billion, according to analysts' forecasts, as demand for AI technologies and the chips that power them continues unabated.
The revenue gains also come alongside impressive profitability, with third-quarter gross margins expected at around 72.5%, with a 2-percentage-point margin of error, a level that represents its commanding share of the potential $1 trillion AI market.
Goldman Sachs added Nvidia to its closely tracked 'Conviction-Buy' list last month on the basis that the chipmaker will "maintain its status as the accelerated computing industry standard for the foreseeable future given its competitive moat and the urgency with which customers are developing and deploying increasingly complex AI models."
Nvidia outlook in focus amid AI-demand surge
That view has investors keenly tracking the group's near-term revenue outlook, which it will release alongside today's third-quarter earnings. Analysts expect Nvidia to forecast revenue for the three months ending in January, its fiscal fourth quarter, to double from a year earlier to $17.8 billion with a bottom line of $3.77 per share.
A key caveat to that forecast, however, as well as projections for Nvidia's 2025 fiscal year, is linked to the U.S. government's recent restrictions on high-tech exports to China. They were toughened in October to include the group's A800 and H800 semiconductors.
Nvidia noted in a Securities and Exchange Commission filing that "given the demand worldwide for our products, we don’t expect a near-term meaningful impact on our financial results" as a result of the new U.S. restrictions, but the longer-term implications could be significant.
Media reports suggest Nvidia is set to unveil a new series of AI chips, designed for customers in China, that will comply with new export rules. Investors will likely seek clarity on the timing of their release when Chief Executive Jensen Huang speaks to investors later this evening.
"If Nvidia is unable to find a compliant and performant [graphics processing unit] to ship to China, the export controls are likely to be a headwind in [fiscal 2025]," said KeyBanc Capital Markets analyst John Vinh. He carries an overweight rating with a $650 price target on Nvidia stock.
"We see a potential ~20% impact, which will likely prove conservative given outsized demand for generative AI and are still modeling $82 billion in [fiscal 2025] Data Center revenues vs. $101 billion prior" to the export controls, he added.
New chips may cushion China export impact
That revenue hit may be cushioned, however, by the release earlier this month of Nvidia's new H200 chip, which it says will be faster and offer more memory to power both generative AI and large-language models than its H100 predecessor.
The new chips, which are expected to ship in early 2024, will also make it easier for clients to run AI applications on Google Cloud using Nvidia-made chips with deeper integration between hardware and software offerings.
Nvidia in late August unveiled a partnership with Google (GOOGL) -) that seeks to leverage its cloud offering to clients, using Nvidia chips and its DGX supercomputing platform, to essentially create a new market for AI-as-a-service to thousands of companies worldwide.
The group is also expanding its reach into the PC market, where rival Intel (INTC) -) holds the lead position. Reports suggest it will use technology from Arm Holdings to design central processing units that will run the Microsoft (MSFT) -) operating system.
Nvidia was one of Arm's biggest financial supporters heading into the September IPO and tried to buy the group before being thwarted by regulators in the U.K. last year.
"We believe Nvidia's story remains stronger than ever, as Nvidia shortens the cadence of its next generation GPU releases given surging demand for GenAI, while the company's three-chip strategy (CPUs, GPUs, DPUs) offers revenue upside and addressable market expansion potential," said CFRA analyst Angelo Zino. He carries a buy rating on Nvidia stock.
"In addition, we believe Nvidia's full-stack AI/software capabilities provide an incredible competitive moat and support its growing installed base," he added
Nvidia shares were marked 1.47% lower in mid-day Tuesday trading to change hands at $496.18 each, a move that would still leave the stock with a 252% gain for the year and a market value of around $1.25 trillion.
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