Nvidia faces a major earnings test tonight: How strong must it be to dispel fears of an AI bubble?

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Under the pressure of competition, Nvidia's performance is currently the greatest test facing the artificial intelligence market.

Nvidia’s highly anticipated financial report will be released after the U.S. market closes on Wednesday (early Thursday morning Beijing time). This is not only a performance review for the chip maker, but also a key touchstone for measuring whether the current AI craze in the U.S. stock market is at risk of a bubble burst.

On the eve of the financial report, the market is shrouded in fear of AI’s disruptive effect and doubts about the sustainability of massive investments. Investors are beginning to feel uneasy about multi-billion dollar AI infrastructure spending by tech giants like Alphabet and Microsoft, while simultaneously fleeing industries such as software that might be threatened by AI, causing significant sell-offs in related sectors. Analysts believe that Nvidia’s performance may be impressive, but may not be enough to dispel investors’ worries about an AI bubble.

According to Bloomberg options market pricing, traders expect Nvidia’s stock price to fluctuate by about 5% the day after the financial report is released. Despite Wall Street’s widespread expectation that the company will deliver strong results, Nvidia’s stock price has only risen 3.4% since the start of the fourth quarter, and there is great uncertainty in the market about whether its stellar results can translate into upward momentum for its shares.

To dispel concerns about an AI bubble in the market, Nvidia not only needs to far exceed expectations in revenue and profit, but also must provide irrefutable evidence in cash flow realization, maintaining profit margins, and future order guidance, to reassure investors nervous about tech giants’ debt-driven spending.

High Growth Expectations and Guidance Reevaluation

Wall Street still has extremely high expectations for Nvidia’s short-term performance. According to analyst estimates compiled by Bloomberg, Nvidia’s revenue in the fourth fiscal quarter ending January 31 is expected to grow sharply by 68% to $65.9 billion. Adjusted earnings per share are expected to surge by 72% to $1.53. Reuters data shows analysts expect first-quarter revenue to further grow by 64.4% to $72.46 billion.

However, merely beating expectations may no longer be enough. Spear Invest Chief Investment Officer Ivana Delevska pointed out that this financial report is especially important because there is considerable concern about whether AI spending is in a bubble; proving that profits have not truly slowed is key. In addition, investors will closely watch updates to Nvidia’s backlog. Executives previously hinted at discussions with customers about next year’s data center orders, and the market expects Nvidia may update its $500 billion backlog figure first disclosed last October.

To strengthen its position in the inference market, according to Reuters, Nvidia last year reached a deal worth about $20 billion to license Groq's chip technology. At the same time, CEO Jensen Huang’s statements in the earnings call will be closely observed. Earlier this month, he described the sell-off in software stocks due to disruption fears as “the most illogical thing in the world.”

Profit Margin Risks and Cash Flow Concerns

Behind dazzling revenue growth, details like gross margin and cash flow are becoming new focal points for investors. According to Bloomberg and Reuters, due to the high production costs of Blackwell chips, Nvidia’s adjusted gross margin in Q4 is expected at 75%, the highest in over a year, and is projected to stay near this level in the current fiscal year.

Melissa Otto of Visible Alpha says profit margin is a potential risk factor; the market will focus on first-quarter margin performance and full-year guidance. Investors need assurance that this high profitability can be sustained amid rising memory chip prices and other input costs.

In addition, according to Swissquote Bank analysis, investors are paying greater attention to the gap between booked revenue and actual received cash. With rising leverage and massive AI capital expenditures, investors want to see not just order contracts but also cash actually received. Since hyperscale cloud computing companies make up nearly 50% of Nvidia’s customer base, the spending willingness and balance sheet health of these large clients directly affects Nvidia’s cash flow quality.

Intensifying Competition and Supply Chain Bottlenecks

Though Nvidia is still the biggest winner of the AI craze, its long-term dominance is threatened by clients developing their own chips and rivals. Reuters reports that Alphabet’s Google has agreed to provide internally developed TPU chips for Anthropic and is negotiating chip supply with Meta, Nvidia’s major client. Moreover, Meta has announced plans to purchase a large number of AMD chips to deploy up to 6 GW of computing power.

Besides changes on the demand side, supply-side limitations may also become a constraint. Jay Goldberg of Seaport Research Partners believes given the capacity limits of TSMC’s 3nm assembly line, it’s hard for Nvidia to achieve significantly faster-than-expected shipment growth.

In overseas markets, developments in China remain a focus. Although Nvidia previously said Q4 would exclude data center revenue from China, investors are eagerly seeking any new updates concerning the company’s sales in the Chinese market.

Risk Warning and DisclaimerThe market has risks; investing requires caution. This article does not constitute individual investment advice and does not take into account individual users’ specific investment goals, financial situation, or needs. Users should consider whether any opinions, viewpoints, or conclusions herein fit their specific situation. Investment based on this is at your own risk. ```