Nvidia (NVDA-Q) could become a victim of its own success. The bar for wowing markets with sizzling quarterly results has never been higher for the world’s most valuable company. Now soaring bond yields threaten to raise it further still.
The US$5.5-trillion chipmaking powerhouse releases first-quarter earnings after the market close on Wednesday. Expectations, as always, are sky-high. Revenue is projected to increase by almost 80 per cent to nearly US$79-billion, according to the median forecast in an LSEG survey of analysts.
UBS, Morgan Stanley and Bank of America are among those who have raised their share price target for the artificial intelligence darling in the last week. BofA’s US$320 figure represents a 44 per cent premium to Monday’s close of US$222.
Yet recent evidence shows that bumper earnings are no guarantee of an automatic rally in Nvidia’s share price, which has fallen in the days immediately following the last three earnings reports.
In February, shares tumbled 5.5 per cent the day after the release of fourth-quarter earnings, the biggest drop in 10 months, even as revenue jumped by 94 per cent. A further 4 per cent slide the next day wiped out US$450-billion of market cap in 48 hours.
Similarly, in November last year, shares slid 3 per cent the day after results, and fell around 6 per cent in the three trading days after the prior earnings report on August 27.
Of course, the AI giant has more than made up for any temporarily lost ground. Its stock price is up around 22 per cent since that earnings release in August last year.
That’s not bad, but it’s also just essentially keeping up with the Nasdaq. For context, the Philadelphia semiconductor index has almost doubled in that time. Does that mean Nvidia is undervalued? Jensen Huang’s company is still sporting a forward price-to-earnings ratio of 23.8, which certainly doesn’t look excessive, especially given the firm’s outlook.
But there is one big cause for concern: spiking bond yields.
Wednesday’s earnings release comes at a crucial moment for the world economy. Bond markets are cracking and long-dated yields are surging to their highest levels in decades, propelled by the energy shock, bubbling price pressures, and growing unease about whether central banks are failing to act aggressively enough to bring down inflation.
Higher bond yields mean discount rates are rising, eroding the present value of future earnings – a disproportionately big concern for growth stocks, particularly tech companies, whose valuations are baking in expectations of abnormally lofty earnings for years.
What’s more, this spike in borrowing costs is coming just as hyperscalers Microsoft, Amazon, Alphabet , Meta and Oracle - among Nvidia’s biggest customers - are taking on record debt to fund their gargantuan investments of up to US$700 billion this year in the AI network.
While Nvidia was sitting on over US$60 billion in cash as of February – a figure that has almost certainly increased – the four main hyperscalers are depleting their reserves as they try to keep up in the AI capex race. Analysts at UBS reckon their combined free cash flow margin will drop this year to 7.7 per cent from 23 per cent last year and 33 per cent two years ago.
That, in turn, means they will increasingly turn to the debt markets. BofA analysts estimate that hyperscalers will borrow US$175-billion this year and as much as US$300-billion annually in the near future. The current growth of hyperscaler debt issuance is among the fastest of any capex cycle on record, almost surpassing the telecom boom in 2001-02, BofA notes.
“Higher bond yields and firmer inflation could start to challenge what investors are willing to pay for long-duration growth stories, even when the underlying fundamentals remain strong,” Ameriprise chief market strategist Anthony Saglimbene wrote on Monday.
In other words, even if hyperscalers continue to produce strong results, investors might not reward them as they have in the past, potentially throwing a very expensive spanner into the AI works.
Nvidia may be able to weather the storm for now.
Despite this week’s stumbles, the AI boom is alive and well, having powered U.S. and world stocks to fresh peaks only last week. Investors remain committed to buying the AI story, and on this score, Nvidia is still the king of the castle.
But caution is warranted. A lot of positive news is already baked into Nvidia’s share price. In March, Huang said Nvidia’s revenue from selling AI chips could top US$1-trillion through 2027, double the figure he projected for 2026 only a month before.
Lofty expectations have so far been vindicated by bumper profits, but given the mounting risks, the persistence of that trend is far from a given. If the Nvidia-led AI juggernaut is going to slow down, it could be for the oldest of old-school reasons: rising borrowing costs.