Ai Trade Hits First Major Test With Nvidia Earnings

Nvidia (NVDA) startled Wall Street three months ago with an unexpected and remarkable revenue forecast, propelling a surge in share prices and fueling heightened investor optimism for companies engaged in artificial intelligence technology development.

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This optimism faces its inaugural significant assessment this Wednesday, as the chip manufacturer is slated to unveil its fiscal second-quarter results.

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On May 25, Nvidia's market value surged by nearly $184 billion, marking the third-largest single-day gain by a U.S. company in market history, according to Dow Jones Market Data. Just the day before, the company had announced an anticipated revenue of approximately $11 billion for the quarter concluding in July, surpassing the consensus estimate of about $7 billion.

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This bold forecast revitalized the AI sector, injecting renewed vitality amid a turbulent period. Technology stocks spearheaded a widespread market surge, even in the face of the most considerable banking crisis in over a decade, the specter of a U.S. default, and the Federal Reserve's campaign to combat inflation by raising interest rates.

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In 2023, Nvidia shares have experienced an almost threefold increase, positioning it as the top performer in the S&P 500. The stock currently commands a premium valuation, trading at 20 times forward sales estimates and 42 times forward earnings, as reported by FactSet. In comparison, the S&P 500 trades at 2.3 times sales and 18.6 times earnings.

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According to Synovus Trust portfolio manager Daniel Morgan, who holds Nvidia shares in both his fund and personal accounts, Nvidia's outlook provided validation that AI can genuinely impact a company's value. He noted, "People were excited, but everything up to that point was all hype."

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The year marked a pronounced commencement of investor interest in the AI theme. Microsoft disclosed a $10 billion investment in OpenAI, the creator of ChatGPT, in January. In the subsequent month, Google's parent company, Alphabet, introduced a competing chatbot. Companies aspiring to develop their own AI programs require Nvidia's graphics processing units (GPUs) to build them. Nvidia's robust sales outlook propelled this enthusiasm to new heights.

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Analysts polled anticipate Nvidia to achieve earnings of $2.08 per share in the recently concluded quarter, nearly double the consensus forecast from April.

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"More than 40,000 companies are already running on Nvidia to speed up, scale up and unlock previously impossible-to-solve problems," stated Nvidia CEO Jensen Huang during the company's annual meeting in June.

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From May 25 to the close of July, the Nasdaq Composite rallied by 15%, while the S&P 500 advanced by 12%.

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Now, the markets are in search of another infusion of AI inspiration. A succession of robust economic data has raised concerns among Federal Reserve officials about the resurgence of inflation, as revealed in the minutes from the July policy meeting. This raises the potential for additional interest rate hikes. Escalating yields for long-term bonds have reduced the allure of stocks relative to bonds. Moreover, the Chinese economy, a vital source of growth for numerous large U.S.-listed stocks, is displaying signs of weakness.

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August has seen the S&P 500 decline by 4.8%, while the Nasdaq Composite has experienced a 7.4% reduction. The PHLX Semiconductor Sector Index, which encompasses Nvidia, has achieved a 37% increase this year, yet it has retreated by 10.3% in August.

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Many of the leading performers for this year have benefited from this fervor. Meta Platforms, the parent company of Facebook, has more than doubled, while chip-focused stocks Advanced Micro Devices and Lam Research have each gained over 50%.

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In this iteration, the expectations to captivate investors are notably elevated. According to Trade Algo, Wall Street analysts are projecting $12.4 billion in Nvidia sales for the ongoing quarter, which concludes in October. By 2025, analysts predict that the company will generate nearly $18 billion in quarterly revenue.

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Amidst Nvidia's substantial stock surge, Wall Street analysts have grown progressively optimistic about the company's prospects. Out of the 50 analysts polled by FactSet, 43 currently assign the stock a "buy" rating. At the outset of the year, this number stood at 28 analysts with a "buy" rating.

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