Nvidia to Report After Volatile Month for Shares

Nvidia (NVDA) recently found itself in strange company near the bottom of large S&P 500^® performers after a gut-churning 16% July plunge. Despite that, the chipmaker's shares have more than doubled this year and surged later in August, buffered by signs of solid demand for its AI products. Wall Street expects solid fundamentals to show up in the company's August 28 fiscal second-quarter earnings report.

The entire semiconductor sector joined Nvidia's retreat as many investors rotated out of technology shares and into more traditional sectors like industrials, small caps, and financials earlier this summer. Some of the move could reflect worries that chip stocks had become overbought following the epic rally led by Nvidia, but there's also growing concern that the potential return on investment for expensive AI chips might not be enough to keep the so-called "hyperscalers" spending in the future. Hyperscalers are companies that spend billions of dollars on AI to bulk up their data center, internet advertising, and search businesses.

While that debate continues, recent earnings from those same hyperscalers like Meta Platforms (META), Microsoft (MSFT), and Alphabet (GOOGL) didn't provide evidence of a pullback or any signs they might stop spending. It was the opposite, actually. Then Taiwan Semiconductor (TSM), which builds chips for Nvidia and other firms at its foundries, reported a 45% year-over-year July sales gain, reinforcing ideas that the AI party isn't over. 

The PHLX Semiconductor Index (SOX) remains below its July peak despite recent positive spending news. But for perspective, its August lows brought it back to roughly where it traded as recently as mid-May, and the SOX is still up sharply for the year. Still, you could argue the law of large numbers is starting to impact the index, which climbed more than 60% in 2023. 

The same law might be a headwind for Nvidia as earnings approach both this quarter and beyond. Nvidia's profits and revenue skyrocketed in 2022 and 2023, making year-over-year comparisons increasingly difficult. The more important benchmarks for investors are probably going to be quarter-over-quarter gains as well as future guidance. 

This is especially relevant ahead of Wednesday's earnings because Nvidia is rolling out its new Blackwell architecture, which the company calls "a new class of AI superchip" and has attracted interest from Amazon (AMZN), Alphabet, Oracle (ORCL), and Microsoft. The chips will cost about the peak price of the company's current H100 line.

"We are poised for our next wave of growth," Nvidia CEO Jensen Huang said on the company's May earnings call. "The Blackwell platform is in full production and forms the foundation for trillion-parameter-scale generative AI."

In its fiscal 2025 first quarter that ended in April, Nvidia reported revenue of $26 billion, up 18% from the prior quarter and 262% from a year earlier. It's the year-over-year comparisons that get tougher from here, something you can see in analysts' expectations for the company's second quarter. The average Wall Street analyst estimate for Nvidia's fiscal 2025 second-quarter revenue is $28.6 billion, according to Yahoo Finance, up from $13.51 billion in the same quarter a year ago. That's an impressive 107% anticipated gain, but that's far below the 262% year-over-year gain in the first quarter.

It doesn't get easier for Nvidia to blow away Wall Street with triple-digit revenue growth in coming quarters either. Fiscal third-quarter revenue last year was $18.1 billion. Even if the company exceeds that by $10 billion, it would mean 55% year-over-year revenue growth when Nvidia reports again in late November.

Margin is another potentially influential aspect to watch with Nvidia and other semiconductor earnings reports. Super Micro Computer (SMCI) delivered robust earnings and guidance when it reported recently, but shares appeared to stumble over margin worries.

"There's no doubt that Nvidia has profited tremendously from their competitive moat, and the company's mid-70s gross margins reflect that," said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. "One important question for NVDA investors going forward is whether the company can maintain these lofty margin levels. With competitive offerings entering the waters and recent investor scrutiny over heavy capital spending on AI, there's at least the potential for this to weigh on NVDA margins at some point down the line. Therefore, I think NVDA's gross margins will be an important metric to monitor in the coming quarters to get a read on the competitive landscape."

For reference, Nvidia said in its last earnings report that gross margins are expected to be in the mid-70s for the full year. Margins like that can be tough to improve.

For the quarter, analysts expect Nvidia to report earnings per share (EPS) of $0.64, up from $0.27 a year ago, according to Yahoo Finance. So far this earnings season, S&P 500 companies beating on EPS results have enjoyed an average gain versus the index the day after reporting a positive 1.5%, the best since the second quarter of 2017, according to Kevin Gordon, senior investment strategist at Schwab. In its fiscal first quarter, Nvidia's EPS easily outpaced Wall Street estimates. 

Data center results will likely be the cornerstone of Nvidia's second-quarter report after first-quarter revenue from that segment hit a record $22.6 billion, up 23% from the previous quarter and up 427% from a year earlier.

One challenge for Nvidia is China. Earlier this month, a possible new China problem arose for Nvidia when The Wall Street Journal reported that Chinese firm Huawei Technologies is close to introducing a new AI chip comparable to Nvidia's H100. That's a chip the U.S. government prohibits Nvidia from selling to China.

Nvidia recently introduced three chips tailored for China, including the most closely watched H20 chips, Reuters reported. However, in line with U.S. sanctions, H20's computing power was significantly capped compared to the H100 chips. Huawei could start shipping its chip as soon as October. Earnings from Nvidia could offer investors a chance to get up to date on Nvidia's China efforts and what kind of potential threat it thinks the Huawei chip might be to its China business.

Earnings also gives Nvidia a chance to update investors on the Blackwell rollout. Worries about potential delays cropped up following a trade media report, hurting Nvidia shares earlier this month on ideas that some revenue could be delayed into early 2025. Nvidia said it doesn't comment on rumors and that Blackwell remains on track to "ramp up in the second half," according to Barron's. The company added that demand for the current-generation Hopper chip remains above production.

The question not only for Nvidia but for AI rivals like Advanced Micro Devices (AMD) and Intel (INTC) is how long the good times can last and whether the late July to early August sector pullback constituted a warning of sorts. The chip industry is extremely cyclical and known for booms and busts. The AI boom began in late 2022, but other parts of the chip industry haven't enjoyed similar excitement. Video games, personal computers, automobiles, phones, and many other products use chips, and not everyone got an invitation to the party.

This includes some aspects of Nvidia, where first-quarter gaming revenue fell 8% sequentially. AMD also suffered from declining gaming revenue when it reported in July and saw a year-over-year drop in its embedded segment where it makes chips for autos, industrial, and networking applications. Intel shares plunged earlier this month when the company presented a weak outlook and announced cost-cutting plans. 

On the positive side, AMD impressed investors last time it reported better-than-expected earnings and revenue as well as a guidance increase, driven by its solid AI business. And the spending spree from mega-cap hyperscalers showed no sign of slowing when those firms reported their results in late July and early August. 

"The rapid advances in generative AI are driving demand for more compute in every market," said Lisa Su, CEO of AMD, in the company's July 31 earnings release.

In fact, spending is so heavy on AI that some analysts questioned whether companies like Alphabet may be making too big of a bet on the technology. Capital spending by the company rose to $13 billion in the latest quarter from $12 billion in the previous one and less than $7 billion a year earlier. Alphabet said its bet on AI is already paying dividends for its business and it intends to keep capital spending at or above $12 billion throughout the year.

"Our AI infrastructure and generative AI solutions for cloud customers have already generated billions in revenues and are being used by more than two million developers," Alphabet CFO Ruth Porat said in the company's earnings call. "We're particularly encouraged that the majority of our top 100 customers are already using our generative AI solutions. We continue to invest aggressively in the business."

Specifically, Alphabet executives said, AI is delivering better responses on more types of search queries and introducing new ways to search. 

Other mega caps are using AI to improve their online advertising or to drive advances in handheld device technology. While the spending appears very heavy from a numbers perspective, it's important to keep in mind that mega caps aren't emptying their pockets either. For instance, Alphabet's $13 billion in capital spending last quarter accompanied quarterly revenue of more than $84 billion and net income of $23.6 billion. 

Meta Platforms CEO Mark Zuckerberg spent several minutes of the company's July earnings call walking analysts through ways AI has improved products like Facebook and Instagram and how it helps advertising clients. "Over the long term, advertisers will basically just be able to tell us a business objective and a budget, and we're going to go do the rest for them," Zuckerberg said. "I think this is going to be a very big deal."

Meta also said in its call that what it calls "core AI" is already driving return on investment in areas like improved engagement and ad performance.

Apple (APPL), another large chip industry customer, introduced its Apple Intelligence system earlier this summer "that puts powerful, private AI models at the core of iPhone, iPad, and Mac." In its most recent earnings call, Apple executives said they expect Apple Intelligence to be deployed across all the apps people use from notes to mail to messages. Developers, Apple added, will also find the technology useful.

While other chip companies offer AI products, Nvidia is the clear industry leader for now and would likely benefit if demand from companies like Apple, Alphabet, and Meta stay strong. None of the recent earnings calls from those mega-cap companies showed any sign of diminished enthusiasm for spending on AI. Meta, for one, expects "to grow capex significantly in 2025," an executive said on its earnings call, and Meta's far from alone.