Nvidia shares have lost 26 percent of their value since their peak of nearly $141 in June.

Why has the price fallen so much over the past two months? Are Nvidia shares a bargain? My thoughts: I’m not sure why the price has fallen, and shares could skyrocket on August 28th if Nvidia reports second-quarter revenue and earnings growth that beat expectations and raises its guidance.

Nvidia stock could be pulled down by the following news:

• SuperMicro’s disappointing margins, which caused the company’s share price to fall by 20%, Yahoo! Finance. This decline appears to have ignored the company’s better-than-expected revenue forecast of $30 billion next year.
• A possible delay in the launch of Nvidia’s new Blackwell chip due to a design flaw, reported by The informationNvidia confirmed that the company expects Blackwell production to increase in the second half of 2024.

It is even possible that hedge funds that sought to raise capital on August 5 to meet margin calls on their underwater carry trades took profits on their Nvidia holdings. The Economist recommended.

Here are the reasons why Nvidia stock could rise:

• A track record that has significantly exceeded growth expectations.
• Large Nvidia customers are planning significant investment increases.
• Nvidia’s leading market share and rapid pace of innovation.

Nvidia’s growth exceeds expectations

Companies can generally enjoy an increase in their stock price when they report better-than-expected sales and earnings growth and raise their forecasts each quarter.

Nvidia has been beating analysts’ expectations since the second quarter of 2023, and that trend is likely to continue when the company releases its second-quarter fiscal 2025 report – for the quarter ending July 2024.

Since the quarter ending July 2023, here are the percentages by which Nvidia has exceeded analysts’ earnings per share expectations, according to Nasdaq:

• Earnings surprise in July 2023: 38.89%
• Earnings surprise in October 2023: 26.67%
• Earnings surprise from January 2024: 16.67%
• Earnings surprise from April 2024: 13.73%

Expectations are high for the quarter ending July 2024.

Analysts expect Nvidia to report earnings per share of $0.59, an increase of 136% over the previous year. Bar chartOn May 22, Nvidia forecast revenue growth of 197% for the second quarter of fiscal 2025 – beating analysts’ expectations, the Wall Street Journal.

Strong AI spending should help Nvidia meet its own ambitious data center revenue targets. Analysts expect Nvidia to report $25 billion in data center revenue in the July quarter, roughly flat year-over-year. magazine reported.

Nvidia stock performance could depend on whether the company beats that target and raises its forecast. Since the size of Nvidia’s earnings surprises has steadily declined over the past four quarters, the AI ​​chip designer’s second-quarter surprise could be smaller than its first-quarter 2024 earnings.

Nvidia customers plan to increase their spending on GPUs

Alphabet, Microsoft, Meta and Amazon – which together account for 40% of Nvidia’s revenue, according to Bloomberg – plan to continue investing heavily in AI-related infrastructure.

As a result, demand for Nvidia’s graphics processors – which are often used to train and run the large language models that underlie generative AI – could continue to grow sharply.

These cloud service providers increased their capital expenditures by 64% to $58.5 billion in the second quarter, according to the magazine – say they would rather invest too much in generative AI than too little.

This is what the breakdown by company looks like:

• Alphabet. In the company’s second-quarter 2024 earnings report, CFO Ruth Porat said future capital spending would be “at or above the first quarter level of $12 billion,” according to the second-quarter investor conference call. The “risk of underinvestment here is dramatically greater for us than the risk of overinvestment,” CEO Sundar Pichai told investors.
• Microsoft. “To meet growing demand for our AI and cloud projects, we will scale our infrastructure investments. Capital spending for fiscal year 2025 is expected to be higher than in fiscal year 2024,” Microsoft CFO Amy Hood told investors in a conference call on July 30.
• Meta. We “currently expect significant growth in capital expenditures in 2025 as we invest in supporting our AI research and product development efforts,” said Susan Li, Meta’s CFO, on the company’s second-quarter earnings call on July 23.
• Amazon. We “expect capital investments to be higher in the second half of the year,” CFO Brian Olsavsky said on a second-quarter investor conference call on August 1. “The majority of the spending will be to support growing AWS infrastructure needs as we continue to see strong demand for both generative AI and our non-generative AI workloads,” he added.

Investors are nervous about generative AI investments

While this should be good news for Nvidia bulls, macroeconomic concerns could prompt some investors to sell the chip designer’s shares. “Nobody has cut the numbers and said things aren’t working with AI or that we’re taking a break on AI,” said Rhys Williams, chief strategist at Wayve Capital Management LLC, Bloomberg“It’s just that people are very nervous,” he added, given the macroeconomic uncertainties.

Of course, investors are also waiting impatiently for companies to quantify the extent to which their generative AI investments are driving revenue and profit growth. “We have not yet seen an opportunity to monetize AI, so the return on this spending is unclear,” said Srini Pajjuri, managing director and senior research analyst at Raymond James, according to Bloomberg“The question is, how long can this go on?”

Contrary to Pajjuri’s claim, some companies are monetizing AI. Meta, for example, reported faster-than-expected revenue growth in its digital advertising business for the second quarter. The reason? Meta’s generative AI advertising platform more effectively matches ads to potential buyers of advertisers’ products, according to an August study. Forbes Post.

In addition, ServiceNow reported a larger than expected backlog due to strong demand for the company’s generative AI-powered digital workflow services, according to a July Forbes Post.

To be fair, given that these companies do not quantify the share of revenue attributable to generative AI, it is unclear whether the resulting profits are sufficient to offset the high costs of developing and running large language models.

However, two things are clear: First, unless companies invest, they are unlikely to be able to benefit from generative AI before their competitors.

Second, there will be a lag—possibly years—between when companies start experimenting with generative AI and when some of those experiments become new growth vectors, I argued in my new book. Brain Rush.

How Nvidia stays at the top

Nvidia dominates the GPU market – with an 88% share in the first quarter of 2024, according to Jon Peddie Research.

Many rivals are trying to grab a piece of that GPU market share. Rivals include AI chips provided by Nvidia customers, including Google’s custom AI accelerator Trillium, Microsoft’s Azure Maia, Meta’s custom AI chip – the Meta Training and Inference Accelerator – and Amazon’s Trainium and Inferentia chips, the companies said in their second-quarter earnings calls.

But thanks to Nvidia’s CUDA software – which developers have been using for over a decade – and a number of partnerships that I’ve written about in Brain Rushit is difficult for these companies – and other competitors such as AMD and Intel – to catch up with the chip designers.

Moreover, Nvidia continues to shape the future. Google and Nvidia’s other data center customers are lining up to take delivery of Nvidia’s cutting-edge Blackwell chips as soon as they become available. CEO Jensen Huang said at an investor conference in May that Blackwell will generate “a lot of revenue” for Nvidia in 2024.

Given the amount of attention Nvidia is getting, I expect the stock to rise sharply on August 28. It will rise significantly if the company beats expectations and increases share prices. Otherwise, the chip designer’s stock is sure to crash.