By Jess Jones
Ahead of its second-quarter results, American chip designer Nvidia is riding high after a successful first half, with shares skyrocketing over 200 per cent since January, and analysts foreseeing more gains.
Nvidia, the S&P 500’s star of the year, is anticipated to report a 65 per cent year on year sales surge to $11.1bn (£8.7bn). Earnings per share are predicted to leap 305 per cent to $2.07.
Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, sees potential for continued growth. There is “more juice to be squeezed from the Nvidia orange,” she said.
“Of course the flipside of that is that the reaction to any disappointment, even minor ones, will be more dramatic too.”
The firm has found success as a result of the US’ crackdown on tech from politically non-aligned countries – most notably its chief economic rival, China.
Last October, the Biden administration introduced export controls on AI chips to curb China’s access to the cutting-edge technology.
More recently, the US Commerce Department (USCD) said it is considering stricter export controls on the Nvidia A100 and H100 chips, which are critical for generative AI systems.
Chinese tech giants like Baidu, Alibaba, and Tencent are reportedly rushing to secure Nvidia chips before embargo impacts.
Demand could also come from the Saudis who, it emerged last Monday, are gobbling up thousands of Nvidia’s H100 chips, each worth $40,000, for use in generative AI models.
Investors are cashing in as Nvidia has “become a proxy play for the artificial intelligence boom and the explosion of ChatGPT”, according to Victoria Scholar, head of investment at Interactive Investor.
The stock’s high valuation, trading at over 225 price to earnings ratio, “poses problems” for value investors and the Fed’s monetary tightening could “dampen demand” throughout the rest of the year.
Nevertheless, Scholar said there is still reason for optimism as “blockbuster demand” comes from cloud providers like Amazon Web Services and Microsoft Azure.
Although the semiconductor industry is prone to boom-bust cycles, Damindu Jayaweera, technology analyst at investment bank Peel Hunt is bullish on the demand outlook for Nvidia.
Despite US embargoes, Chinese companies can still drive demand because USCD allows cloud access, meaning China can use any AI clouds that run on Nvidia chips.
“It sure is an area worth monitoring given China historically accounted for 20-25 per cent of NVIDIA’s data centre demand and is a source for large orders in recent times,” Jayaweera explained.
In the short term, he said, demand is being boosted by the heavy investments in generative AI companies like OpenAI, Inflection, Anthropic, and Cohere.
Looking further ahead, privacy and data concerns will drive up demand in order for global data centres to reduce reliance on US-based data centres operated by the major cloud vendors.
“No EU government, for example, wants to use a GenAI training from outside the EU,” said Jayaweera.
However, he warned supply could falter and the buyer should beware because even a small amount of pessimism is “enough to pop any valuation ‘bubble’ in this market.”
