Expectation of doubled revenue, 10% implied volatility! Is the market underestimating the risk of NVIDIA's financial report?

This Thursday, the AI giant NVIDIA will release its highly anticipated financial report, with investors eagerly awaiting, expecting strong performance and hoping for a new high in stock price.

The market widely expects NVIDIA's second-quarter revenue to double year-on-year, reaching $28.68 billion. In the past few quarters, NVIDIA's performance has consistently exceeded expectations, with revenue surpassing expectations by approximately $1.5 billion each quarter.

The key lies in whether NVIDIA can "catch" the market's optimism. As a leader in the semiconductor industry, its performance directly affects the confidence and performance of the entire industry and even the broader market.

Daniel Morgan, Senior Portfolio Manager at Synovus Trust, stated that NVIDIA is not only a benchmark in the chip industry but also in the entire artificial intelligence industry. If NVIDIA fails to meet expectations, investors may sell off all companies in the AI sector.

Currently, the options market has already "booked" high volatility, with NVIDIA's options implying a stock price volatility of 10%. Since 2018, the stock has never dropped by more than 8% on the day of the financial report. NVIDIA's market value is currently close to $3 trillion.

High Expectations Persist, Doubling Revenue Year-on-Year

According to data from the London Stock Exchange as of August 23rd, it is expected that NVIDIA's second-quarter revenue will increase by approximately 112% year-on-year, reaching $28.68 billion. However, due to increased demand leading to higher production costs, its adjusted gross margin is expected to decrease by over 3 percentage points, from 78.8% in the previous quarter to 75.8%.

However, the market has always expected this AI leader to exceed expectations, rather than just meet them. Some investors are concerned about whether NVIDIA can meet high expectations this time.

Analysts predict that NVIDIA's financial report will have a significant impact on the AI sector on Thursday. If it exceeds Wall Street's expectations, it may further boost the AI sector; conversely, if it falls slightly short, it may impact the stock price.

At the same time, some analysts warn that with the expansion of scale, NVIDIA's growth may slow down.

NVIDIA's stock price has soared by over 150% so far this year, increasing its market value by $1.82 trillion and driving the S&P 500 to new highs. Currently, NVIDIA's price-earnings ratio is around 37 times, compared to an average price-earnings ratio of around 29 times for the "Big Seven" stocks in the US.

Michael Schulman, Chief Investment Officer at Running Point Capital, stated:

We are facing the law of large numbers, once a company reaches a certain size, it actually cannot maintain the same growth.

Is the Market Underestimating Risks?

Bank of America analyst Gonzalo Asis warned in a recent report:

The market "may be underestimating the risk of disappointing NVIDIA performance," and the financial results may bring unexpected volatility to the market.

The report mentioned:

NVIDIA's options imply a stock price volatility of 10%, which means the stock price could fluctuate by 10% in either direction, and since 2018, the stock has never dropped by more than 8% on the day of the report. The volatility index (VIX) on August 5 was 65, highlighting the return of vulnerability to the broader market, with the S&P 500 index often remaining fragile after such a significant impact. Any adverse results in NVIDIA's financial report could further exacerbate market instability.

Since July, due to market concerns about whether AI massive spending can bring corresponding returns, the AI industry chain stocks have experienced a wave of pullbacks. NVIDIA's stock price fell by 20% for most of July and early August, although there has been some recovery recently, the price is still about 5% lower than the historical high in June.

However, Goldman Sachs is more optimistic about NVIDIA's current situation, expecting its Q2 revenue and earnings per share to reach $29.769 billion and $0.68, respectively, exceeding market expectations by 4.1% and 5.9%, with earnings per share expected to exceed market expectations by 11% by 2025.

Although the stock price is around $125 in both June and now, the current valuation and expectations are more rational and balanced compared to June, with an optimistic view on earnings and sustained demand trends.

There is room for earnings growth, with an expected earnings per share (EPS) of $4.16 for the fiscal year 2025; and strong demand trends continue, with strong demand from cloud service providers (CSPs) and enterprises, which may support NVIDIA's performance.

The performance trend over the past few quarters, with revenue exceeding expectations by about $1.5 billion each quarter (with reference to the revenue expectation of around $28.8 billion in the July quarter), and an expected increase in revenue of about $2 billion quarter-on-quarter in the next quarter.

The impact of the delayed next-generation Blackwell is also a focus

The anticipated next-generation AI chip Blackwell production by NVIDIA may be delayed, and the impact is also a focus of this performance.

NVIDIA's CEO Jensen Huang stated in May that the chip would be shipped in the second quarter. However, analysts subsequently pointed out that design obstacles could delay the shipment.

Some analysts suggest that NVIDIA can offset most of the impact of the Blackwell chip delay by using the previous generation Hopper chip to replace Blackwell chip orders. While the functionality and profit of the Hopper series processors are not as good as Blackwell, they are sufficient for most AI-related applications.

JP Morgan believes that the GB200 capacity expansion may slow down in the second half of 2024 but is expected to significantly expand in 2025. Despite facing initial production challenges, it is expected that the GPU shipments related to Blackwell will still reach around 4.5 million units in 2025. TSMC's revenue is expected to remain relatively stable.

Research firm SemiAnalysis indicates that if NVIDIA's chip contractor TSMC raises fees, NVIDIA's revenue growth in the first half of next year may be impacted, and gross margins may also be squeezed. LSEG data shows that Nvidia is expected to see a 75% revenue growth to $31.69 billion in the third quarter, ending its five consecutive quarters of triple-digit growth. In the same period last year, the company's revenue surged by about 206% to $18.12 billion