Nvidia’s Earnings Are A High-risk Event For AI-crazed Markets

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(Bloomberg) — Big tech’s earnings season is ending with a bang: Nvidia Corp., at the center of the artificial intelligence craze, is reporting results that could set the direction for global stock markets for the rest of the year.

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The chip maker has added more than $370 billion in market value since its last update, and is the biggest contributor to the Nasdaq 100’s 36% rally this year. Nvidia has picks and shovels in the processor AI gold-rush that has boosted the markets this year, making its report much more important than a typical earnings release.

Ben Reitzes, an analyst at Melius Research, said, “What Nvidia has said about guidance for the remainder of fiscal 2014 drives perception about the entire AI thesis that has driven the market.”

The chip maker’s Wall Street cheerleaders are hoping for more good news.

Data compiled by Bloomberg shows analysts are raising price targets ahead of the second-quarter report, which expects revenue to rise 65% from the year-ago period to about $11 billion. Expectations from institutional investors are even higher, at around $12 billion, according to Citigroup.

And many analysts, such as HSBC’s Frank Lee, say the stock has yet to go further — despite trading at more than three times expected gains this year.

“While market expectations for Nvidia and the overall AI supply chain have clearly risen, we expect faster AI server speeds to continue to exceed market expectations,” Lee wrote in a research note on Monday. That’s reflected in Nvidia’s share price.

As one of a handful of companies valued at more than $1 trillion, Nvidia’s post-earnings share-price changes have the potential to carry the entire S&P 500 with them. According to data compiled by Bloomberg, options market activity on the day following the report is indicating a 10% increase in the share price. On Wednesday, the stock was up 0.6% in the red.

Inevitably, other stocks with exposure to AI — giants such as Alphabet Inc and Microsoft Corp and smaller companies such as Palantir Technologies Inc — will see the biggest impact. But the report is critical of markets outside the US — for stocks such as Nvidia supplier Taiwan Semiconductor Manufacturing Co and chip equipment giant ASML Holding NV.

With such high expectations, the disappointment is bound to be overwhelming.

“If they missed, the whole stock market would go down,” Adam Parker, founder of Trivariate Research, said in an interview. “There’s no question about it.”

A wildcard is supply. Some on Wall Street are warning that sales could be limited by Nvidia’s ability to secure enough chips from TSMC. Still, most don’t think it will be a problem for the stock if the forecasts are good, as those sales will be pushed into subsequent quarters.

For the broader market, a positive report could help assure that AI has the game-changing potential to boost productivity and profits across many industries, in the face of headwinds including high interest rates and an economic downturn. Strategists at Goldman Sachs this week introduced a “trade after AI” basket — stocks with the greatest potential growth in long-term earnings from AI’s impact on labor productivity.

The strategists, led by Ryan Hammond, wrote in a note that the average stock in that basket could soar 72% above its current baseline following broad AI adoption.

But Morgan Stanley’s Michael Wilson – a veteran equity bear – warned that sour sentiment about the macroeconomic backdrop means even the results may not be enough to lift the market this time around.

“We don’t think Nvidia’s excellent results will change the complexion of recent price action for other derivatives plays or the broader market as it did in May,” he wrote.

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