Nvidia's higher profits could test its AI dreams in the US stock market

Written by David Randall and Saqib Iqbal Ahmed

NEW YORK (Reuters) – Next week's earnings report from chipmaker Nvidia could serve as an inside examination of one of the market's hottest names, and of the artificial intelligence fever that has helped drive gains for U.S. stocks in recent months.

Excitement around the commercial potential of artificial intelligence has boosted Nvidia shares more than 46% since January 1. Its $570 billion market capitalization is more than three times Intel's market capitalization. Shares of Nvidia, whose chips are considered the gold standard in the AI ​​industry, are up nearly 240% in 2023.

The chipmaker's gains accounted for more than a quarter of the increase in the S&P 500 index this year. The benchmark index is up nearly 5% year to date, after optimism about artificial intelligence helped push the index up 24% in 2023.

Now the third most valuable company on Wall Street after Apple and Microsoft, Nvidia has also become a leader in the artificial intelligence industry. Other AI-focused stocks have soared this year, including Super Micro Computer Inc., which is up 182% year-to-date, and Arm Holdings, which is up nearly 71%.

“When people say the market is doing well this year, they really mean technology is doing well, and Nvidia is at the core of that,” said Keith Lerner, chief market strategist at Truist Advisory Services. “There is excitement within AI, and if that optimism is not met by profits, you can see that quickly reverberate and impact sentiment.”

Nvidia will release quarterly earnings results on February 21. Wall Street expects earnings of $4.56 per share and a rise in quarterly revenue to $20.378 billion from $6.05 billion last year, according to the average estimate from 33 analysts, based on LSEG data.

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Given the company's size and importance to the AI ​​story, Nvidia's results could be pivotal to market sentiment, said Kevin Landis, a portfolio manager at Firsthand Capital.

“Every time you get a big stock market rally, there's a favorite stock that leads it,” said Landis, who regrets selling his Nvidia stock last year. “It's hard not to look at Nvidia and see…that's what's driving the overall market psychology.”

Not surprisingly, traders are bracing for big moves in the company's shares. Nvidia options are pricing in a swing of about 11% in either direction following their results, according to data from options analytics service ORATS.

ORATS data showed that this is the largest expected move options traders have made ahead of Nvidia's earnings over the past three years and well above the stock's average earnings move of 6.7% over that period.

Positive updates to Nvidia's outlook could fuel more optimism about artificial intelligence and extend a market rally that has been concentrated in the so-called Magnificent Seven group of mega-cap stocks, of which Nvidia is one, said Tom Heinlein, chief investment strategist at U.S. Bank Wealth Management. Its shares. member.

Shares of Meta Platforms, another member of the group, are up 34% this year while Apple shares are down 5%. Tesla shares fell nearly 20% after the electric car maker warned of “significantly lower” sales growth this year and shrinking margins.

“Right now, investors are rewarding their view of earnings growth and that's good for more gains for Nvidia,” Heinlein said.

On the other hand, investors may use a less-than-stellar report as an opportunity to take profits.

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Ryota Makino, a research analyst at Gabelli Funds, believes investor enthusiasm for Nvidia is so high that its shares could fall by at least 10% if the company simply meets expectations, without exceeding them.

He remains bullish on Nvidia because of rising capital expenditures from clients like Amazon.com and Microsoft in their cloud businesses, which rely on the company's chips.

The disappointing report from Nvidia could also exacerbate concerns about crowding out in the market's biggest stocks, said Michael Purvis, president of Tallbacken Capital Advisors.

Overall, investors had their highest allocations to the technology sector since August 2020, according to fund managers in the latest BofA Global Research survey.

“This is the foundation of the index's growth today, but at some point the fuel tank will become empty,” Purvis said.

(Reporting by David Randall and Saqib Iqbal Ahmed; Editing by Ira Iosibashvili and David Gregorio)

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