(Bloomberg) -- With Nvidia Corp. shares at record highs, it’s getting harder for investors to gauge how even potentially blowout earnings can push the stock higher.
The world’s most valuable chipmaker is expected to clear a high hurdle with its post-market release Tuesday — just as it did in the previous two quarters — with no signs of a slowdown in demand for its artificial intelligence computing chips.
Given its 240% gain this year, the stock has little room for error. This was illustrated in August when Nvidia saw the boost from a stellar earnings report fade, as S&P 500 index gains lost steam in the days following.
“In the near term, great isn’t always good enough,” said Julian Emanuel, chief equity and quantitative strategist at Evercore ISI.
Nvidia’s performance has become critical for the market-capitalization weighted S&P 500 Index. The stock accounts for nearly 15% of the gauge’s 2023 rally, according to data compiled by Bloomberg — meaning a big earnings miss could have significant consequences.
After punching above the $500-per-share level to close at a record high on Monday, the chipmaker has a market value of $1.23 trillion, giving it the fifth-biggest weighting in the S&P 500 at about 3.3%. Nvidia shares edged lower on Tuesday, falling 1.4%.
Dan Morgan, senior portfolio manager at Synovus Trust Co., acknowledges it’s getting harder for Nvidia to impress investors given how “incredible” the company’s financial performance has been in the past two quarters.
“Everybody expects great news, everybody expects them to beat and raise,” he said. “Even if they do that, that’s what everybody expected.”
In the run-up to the results Nvidia has been rallying, adding about $220 billion in value this month. The options market is implying a one-day move of 7% in either direction on the day after the report, according to Bloomberg-compiled data.
Demand for Nvidia’s AI accelerators is showing no signs of easing as tech giants like Microsoft Corp. Amazon.com Inc., Alphabet Inc. and Meta Platforms Inc. invest heavily to ramp their generative AI capabilities.
“Nvidia continues to be very responsive to the surging demand, having grown the data center business 3x in just a couple of quarters,” Morgan Stanley analyst Joseph Moore wrote in a note, citing “extraordinarily strong” channel checks.
Nvidia Set to Post Another Sales Surge Amid AI Boom: Preview
Analysts have continued to raise profit estimates. The average projection for fiscal 2025 adjusted earnings per share has nearly tripled in the past six months, according to data compiled by Bloomberg.
The company, which saw revenue more than double in the last quarter, is now expected to report third quarter sales growth of 171% — making it the fastest-growing member among the seven largest companies that have been driving this year’s stock market rally.
Nvidia shares dropped in October after the US expanded curbs designed to block China’s access to advanced computer chips. However, most analysts covering the stock aren’t expecting the restrictions to have a major near-term impact on the company, as it can prioritize orders from US firms.
“Now it is a game of expectations,” said Adam Sarhan, chief executive of 50 Park Investments, which owns Nvidia shares.
“Nvidia has already indicated how strong its earnings growth could be, so even if there is some short-term disappointment, assuming the long-term story remains intact, cooler heads will eventually prevail.”
Tech Chart of the Day
The Nasdaq 100’s projected profit estimates are scaling fresh highs as the tech-heavy benchmark extends its year-to-date rally. The index has jumped 45% this year, adding about $6 trillion to its market value. Profit estimates are rising fast, backing up this year’s rally.
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--With assistance from Michael Msika and Ryan Vlastelica.
(Updates shares throughout.)
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