Written by David Randall and Saqib Iqbal Ahmed
NEW YORK (Reuters) – Chipmaker Nvidia’s earnings report next week could be a gut check for one of the market’s hottest stocks and the artificial intelligence fever that has helped propel U.S. stocks higher in recent months. be.
Excitement about AI’s business potential has pushed Nvidia stock up more than 46% since January 1st. The company’s $570 billion market cap increase is more than three times Intel’s market cap. Shares of Nvidia, whose chip is considered the gold standard in the AI industry, soared nearly 240% in 2023.
Chipmakers’ profits accounted for more than a quarter of the S&P 500’s gains this year. The benchmark index is up nearly 5% year-to-date after optimism about AI pushed the index up 24% in 2023.
Now the third most valuable company on Wall Street after Apple and Microsoft, Nvidia has also become a bellwether in the artificial intelligence industry. Other AI stocks have also soared this year, including Super Micro Computer, which is up 182% since the beginning of the year, and Arm Holdings, which is up nearly 71%.
“When people say the market is strong this year, what they really mean is that the technology industry is strong, and Nvidia is at the heart of that,” said Keith Lerner, chief market strategist at Turist Advisory Services. ” he said. “There is excitement within AI, and if that optimism is not met by earnings, it could quickly resonate and weigh on sentiment.”
Nvidia is scheduled to release its quarterly results on February 21st. Wall Street expects earnings of $4.56 per share and quarterly revenue of $20.378 billion, up from $6.05 billion a year earlier, according to the average estimate of 33 analysts based on LSEG data. ing.
Kevin Landis, portfolio manager at First Hand Capital, said Nvidia’s performance could be critical to market sentiment given the company’s size and importance to the AI story.
“Every time there’s a big rally in the stock market, there are certain stocks that are the favorites to drive the market,” Landis said. He regrets selling his Nvidia stock last year. “If you look at Nvidia, you can see that it’s driving overall market sentiment.”
Understandably, traders are bracing for big moves in the company’s stock. NVIDIA options are pricing in about an 11% move in either direction following that outcome, according to data from options analysis service ORATS.
This is the highest amount that option traders have priced in Nvidia’s earnings in advance over the past three years, and is significantly higher than the company’s average earnings increase of 6.7% over the same period, ORATS data shows. Ta.
Tom Heinlin, senior investment strategist at U.S. Bank Wealth Management, said a positive update to NVIDIA’s outlook for the company would further increase optimism for AI, which would increase the so-called mega-cap stocks of which NVIDIA is a member. He said the market rally, which was concentrated in the Magnificent Seven Group, could expand. member.
Meta Platforms, another member of the group, has seen its stock rise 34% this year, while Apple’s stock has fallen 5%. Tesla shares fell nearly 20% after the electric car maker warned of “significantly weaker” sales growth this year and compressed profit margins.
“Investors are now appreciating the visibility of earnings growth, which will significantly contribute to further profits for NVIDIA,” Heinlin said.
On the other hand, investors may use less-than-favorable reports as an opportunity to book profits.
Ryuta Makino, a research analyst at Gabelli Funds, said investor enthusiasm for Nvidia is so high that if the company simply meets expectations without exceeding them, the company’s stock price could fall by at least 10%. I think it’s sexual.
He remains bullish on Nvidia as customers such as Amazon.com Inc. and Microsoft Inc. are increasing capital spending on cloud businesses that rely on the company’s chips.
Michael Purves, head of Thorbakken Capital Advisors, said Nvidia’s disappointing report could further exacerbate concerns about crowding in the market’s biggest stocks.
Overall, investors have the highest allocation to the tech sector since August 2020, according to fund managers, according to the latest research conducted by BofA Global Research.
“This is the pillar of exponential growth today, but at some point the gas tank will be empty,” Purves said.
(Reporting by David Randall and Saqib Iqbal Ahmed; Editing by Ira Iosebashvili and David Gregorio)
