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You might think increasing revenue by 56% year over year, beating sales and EPS expectations, and forecasting more demand for its chips would earn Nvidia an A+ for its earnings report. But investors grade the chipmaker on a curve.
Shares sank 0.82% today as traders zeroed in on the AI giant’s good—but not great—performance, with a particular focus on its data center revenue, which came in slightly below expectations.
The cracks in the facade come at a time when investors are already on edge about the longevity of the AI trade. Nvidia now represents roughly 8% of the entire S&P 500’s market cap, and is the dominant force behind the AI trade, which is what has propelled the stock market to new heights of late. That creates a reasonable fear among traders: If Kingvidia falters, the entire house of cards could come down.
Why the pros aren’t scared
Analysts, however, largely believe Nvidia can keep meeting the market’s high expectations.
For one, China remains a huge, untapped market. While nobody has a crystal ball, many analysts foresee the export restrictions on Nvidia’s chips easing—and if they are, management says Nvidia could haul in an additional $2 billion to $5 billion in revenue during the October quarter alone.
“Ultimately, we anticipate that Nvidia will receive all the necessary approvals and support from both the US and Chinese governments to eventually sell lower-powered products, such as the H20, into the region,” wrote Morningstar equity analyst Brian Colello in a note.
AI hardware demand isn’t waning, either. Wall Street thinks big tech companies will shell out $350 billion in AI spending this year and $402 billion next year—and while the price tag may have some investors worried, the opportunities in AI remain lucrative enough to warrant such massive spending.
“If roughly one-third of tasks in the global economy can be automated, with a labor share of 50% and AI vendors capturing 10% of the value, the annual AI revenue opportunity could reach $1.5 trillion,” wrote UBS Global Head of Equities Ulrike Hoffmann-Burchardi in a recent note.
Nvidia will be a core part of meeting that demand, which is why, despite the stock’s staggering run, many still view it as a long-term value pick. “We continue to see this as the best risk/reward in the AI space,” explained Morgan Stanley analyst Joseph Moore. He raised the firm’s price target on Nvidia from $206 to $210, over 16% higher than where shares trade today.—LB