Will Nvidia’s report reignite optimism on Wall Street?

Following Nvidia’s earnings, there should be no doubt that demand for artificial intelligence remains enormous and continues to support the company’s business at a rapid pace. Nvidia appears largely unfazed by the high base effect. Revenue grew 65% year over year last year, while Data Center sales increased 72% YoY - growth rates typically associated with high-growth companies gaining market share, not a giant valued at $4.7 trillion. We are living through a technological revolution from which Nvidia is directly benefiting. Since the release of ChatGPT, the company’s Data Center sales have increased 13-fold.

Both Jensen Huang’s commentary and the quarterly report itself make it clear that AI demand still exceeds available chip supply. The company’s guidance for the current quarter points to revenue of more than $79 billion, compared with $68 billion in the previous quarter. That implies roughly 20% quarter-over-quarter growth - all without any chip sales to China. One could argue that, for now, Nvidia does not need the Chinese market to maintain its breakneck growth, although strategically reopening it would be a major development. Nvidia also delivered $1.62 in earnings per share versus $1.52 expected. The question, therefore, is no longer whether the AI boom is real or whether Nvidia will continue to profit from it, but whether this will be enough to reignite a broader optimism on Wall Street.

The answer is not straightforward. While the Nasdaq 100 had risen ahead of Nvidia’s report, it did not react with overwhelming optimism. Since the beginning of the year, the index has gained less than 0.5%, compared with a 1.3% increase in the S&P 500 and just over 2% for the Dow Jones Industrial Average. U.S. indices have had an unusually “sluggish” start to the year, during which European and emerging markets have clearly outperformed New York. Nvidia has accustomed investors to strong results and consistent earnings beats. As a result, an excellent quarter may ease concerns about the sustainability of the “AI bull run,” but it no longer serves as a powerful buying catalyst capable of pushing the Nasdaq several percentage points higher. A few quarters ago, that was not the case. The stock’s reaction to earnings was muted: shares initially rose nearly 4% in after-hours trading but ultimately closed only slightly higher.

A decline at tomorrow’s open could be interpreted as a warning signal, although such a scenario seems difficult to imagine after such a strong quarter and optimistic forward guidance. Nvidia’s valuation also somewhat tempers these concerns and does not appear excessive. The stock trades at just under 30 times forward 12-month earnings, compared with an average of 24 for Nasdaq 100 companies. Given the scale of its growth, this multiple appears to leave room for further upside rather than signal extreme overvaluation. Companies benefiting from AI infrastructure may not have said their last word, and in the foreseeable future, demand for their products is likely to remain very strong. However, it would be unwise to assume that the current growth dynamics in the sector can continue indefinitely - especially if hyperscalers were to slow capital expenditures due to rising debt burdens or other external factors that are difficult to anticipate today.

The market has reassured itself that Nvidia’s business - and that of companies multiplying profits through AI hardware sales - is thriving. At the same time, concerns are growing about what lies beneath the surface: thousands of other businesses and their growth prospects. There is increasing anxiety about the broader market’s condition - whether AI investment could slow and whether artificial intelligence might disrupt the business models of companies, including those listed on Wall Street. If a broader “crisis” were to emerge in any form unrelated to infrastructure providers, it would be difficult to expect the semiconductor bull market to continue indefinitely.

This time, however, Nvidia did what it needed to do. It demonstrated that such a turning point has not yet arrived and is not expected in the near term. The projected 20% quarter-over-quarter revenue growth reinforces that view. Such performance is not typical of a market about to slam on the brakes. Perhaps investors have recently become overly cautious, and the recent pullback in software stocks - combined with Nvidia’s still relatively “conservative” valuation for a growth company may lay the foundation for the next leg of the technology bull market.

Eryk Szmyd 

XTB Financial Markets Analyst