Wall St Week Ahead-High-flying Nvidia’s earnings could test US stock market’s AI dreams

Makino Milling Machine

16/02/2024 22:29

By David Randall and Saqib Iqbal Ahmed
       NEW YORK, Feb 16 (Reuters) - Next week’s earnings report
from chipmaker Nvidia  .NVDA  could prove a gut check for one of
the market’s hottest names, and for the artificial intelligence
fever that has helped power gains for U.S. stocks in recent
months.  
    Excitement over the business potential of AI has boosted
Nvidia’s shares by more than 46% since Jan. 1. Its $570 billion
increase in market capitalization is more than triple the market
value of Intel  INTC.O . Shares of Nvidia, whose chips are
considered the gold standard in the AI industry, surged nearly
240% in 2023. 
    The chipmaker's gains have accounted for more than a quarter
of the S&P 500's increase this year. The benchmark index is up
nearly 5% year-to-date, after optimism about AI helped drive the
index up 24% in 2023.
        Now the third 
    most valuable
     company on Wall Street after Apple  AAPL.O  and Microsoft
 MSFT.O , Nvidia has also become a bellwether for the artificial
intelligence industry. Other AI-focused stocks have surged this
year, including Super Micro Computer Inc  SMCI.O , which is up
182% year-to-date, and Arm Holdings  ARM.O , up nearly 71%.
    "When people say that the market is doing well this year,
they really mean that tech 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 fulfilled by earnings then you could see
that reverberate quickly and weigh on sentiment." 
    Nvidia will release quarterly earnings results on Feb. 21.
Wall Street expects earnings of $4.56 a share, and a rise in
quarterly revenue to $20.378 billion from $6.05 billion a year
ago, according to the mean estimate from 33 analysts, based on
LSEG data.
    Given the company's size and its importance to the AI story,
Nvidia’s results could be pivotal for 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 shares in Nvidia last year. "It's hard not to look at Nvidia
and see … that's driving the psychology of the overall market." 
    Not surprisingly, traders are bracing for big moves in the
company’s shares. Nvidia options are pricing a swing of about
11% in either direction following its results, according to data
from options analytics service ORATS. 
    That's the largest expected move options traders have priced
ahead of Nvidia's earnings over the last three years and well
above the stock's average earnings move of 6.7% over that
period, ORATS data showed.
    Tom Hainlin, senior investment strategist at U.S. Bank
Wealth Management, said positive updates to Nvidia's corporate
outlook could fuel more AI optimism and extend a market rally
that has been concentrated in the so-called Magnificent Seven
group of megacap stocks, of which Nvidia is a member. 
    Shares of Meta Platforms  META.O , another member of the
group, have surged 34% this year while Apple’s have fallen by
5%. Shares of Tesla  TSLA.O  have tumbled nearly 20% after the
electric car maker warned of "notably lower" sales growth this
year and shrinking margins. 
        "Right now investors are rewarding visibility into
earnings growth and that keys up well for more gains for
Nvidia," Hainlin said. 
    On the other hand, investors may use a less-than-stellar
report as an opportunity to take profits.
    Ryuta Makino, 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 due to rising capital
expenditures from customers such as Amazon.com and Microsoft
into their cloud businesses, which rely on the company’s chips. 
    A disappointing report from Nvidia could also exacerbate
concerns over crowding in the market’s largest stocks, said
Michael Purves, head of Tallbacken Capital Advisors. 
    Overall, investors have their highest allocation to the tech
sector since August 2020, according to fund managers in the
latest survey conducted by BofA Global Research.
    "This is the pillar of the growth for the index today, but
at some point the gas tank will go empty," Purves said.

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GRAPHIC: Nvidia's growing clout    https://tmsnrt.rs/3SJI5xX
GRAPHIC: AI spillover    https://tmsnrt.rs/498QVfH
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 (Reporting by David Randall and Saqib Iqbal Ahmed; Editing by
Ira Iosebashvili and David Gregorio)
 ((David.Randall@thomsonreuters.com; 646-223-6607; Reuters
Messaging: david.randall.thomsonreuters.com@reuters.net))
 
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