What if Nvidia loses revenue?

This time around, Morningstar technology stock strategist Brian Colello is confident the chipmaker’s momentum will continue.

“I would be surprised if they didn’t meet guidance for the July quarter and/or raise it for the October quarter,” he says.

But in the unlikely event that investors are disappointed by the company’s results, he warns that the ramifications would be far-reaching: “It’s fair to say that if Nvidia’s stock were to fall for any reason, it would wipe out everything related to AI. name with her.”

Because mega-cap AI companies are so heavily weighted in major indexes, a stumble by Nvidia could spill over into the broader market.

Here’s everything investors need to know ahead of Nvidia’s earnings.

Morningstar Key Values ​​for Nvidia Stock

• Estimated fair value: $105.00 (£80.03)
• Morningstar rating: ★★★
• Morningstar Economic Moat Rating: Lat
• Morningstar Uncertainty Rating: Very High

Wild Ride from Nvidia Stock

Shares of Nvidia are up 157% this year and 194% over the past 12 months. The stock fell in early August amid a market sell-off triggered by concerns about economic growth and a stronger Japanese yen, but has almost recovered all of its losses. Shares are up more than 9% in the past week. The stock is now trading at about $128 a share, and Colello believes it is fairly valued.

In general, analysts remain optimistic. Nvidia posted revenue of $26 billion in its fiscal first quarter ended April 2024. They expect the company to beat their revenue estimates of about $28 billion in the July quarter, according to FactSet consensus estimates.

“As in recent quarters, we believe Nvidia will report results that beat guidance, while projecting even higher revenue in the October quarter,” Colello writes. He points to continued spending by cloud computing firms like Microsoft ( MSFT ), Meta Platforms ( META ) and Amazon ( AMZN ) on AI infrastructure. He adds that Nvidia should be able to grow revenue further as its supplier constraints ease over the next few quarters.

Meanwhile, analysts at Goldman Sachs predict “another strong year of double-digit revenue and earnings growth for Nvidia,” while Bank of America analysts characterize the stock’s recent volatility as a buying opportunity rather than a reason to long term concern.

“This company has been beyond phenomenal,” says Steve Sosnick, chief strategist at Interactive Brokers.

“I can’t think of a company that has so consistently beaten expectations, raised expectations and then come back the next quarter, beaten those expectations and then raised them again. It’s unprecedented.” But at the same time, he adds, “it’s hard to imagine the streak going on forever.”

Can Nvidia stock continue to rise?

For Colello, the bigger question surrounding Nvidia stock is the sustainability of AI spending over the long term. For now, he writes, “both Alphabet (GOOGL) and Meta have recognized that it’s much riskier to underinvest in AI than to overinvest.” While this may bode well for the stock in the short term, it “increases the risk that investment will collapse at some point once an adequate supply of AI GPUs is secured.”

Sosnick agrees: “The question we have to wrestle with is whether the AI ​​adoption cycle can continue at this rate.” The market selloff in August was a sign that investors are already beginning to question the deal’s sustainability. Tech names stumbled while value stocks and small caps rose.

“We’ve seen the AI ​​trade come down a little bit over the last month versus the broader market because I think the market has appropriate concerns about the longevity of spending,” Colello says.

Risks for index fund investors

Strategists say it’s not just AI companies that could struggle if Nvidia disappoints. “There are side effects,” says Sosnick.

So far this year, Nvidia alone has been responsible for 4.12 percentage points (about a quarter) of the Morningstar US Market Index’s 17.2% return, according to Morningstar Direct data.

Sosnick explains that an investor in an S&P 500 index fund might assume he owns a diverse basket of stocks, but eight of the top-weighted artificial intelligence firms (Nvidia, Amazon, Apple (AAPL), Microsoft, Meta, Tesla (TSLA ), Alphabet and Broadcom (AVGO)) now account for about a third of that fund’s weighting. Despite some signs that the market’s gains have extended beyond big tech, “concentration risk is nowhere near gone,” he says.

That means if the AI ​​trade falters due to Nvidia’s less-than-stellar earnings, investors could feel the impact across their entire portfolio. “Nvidia occupies such a privileged space in the investor mindset,” says Sosnick. If the company stoked investor concerns that AI trading is slowing, “that could have very strong ramifications.”