Projected Outcome: Nvidia may Struggle to Meet the Elevated Financial Demands Expected from Wall Street on August 27th.

Forecast: Nvidia Likely Fails to Meet Exorbitant Financial Targets Set by Wall Street, Predicted for August 27

Artificial intelligence (AI), much like the internet before it, has only been mainstream for a little over two years, making it unlikely that it has fully matured. This fact, combined with the rapid growth of companies like Nvidia, has raised concerns about the sustainability of their growth and the potential for a market correction.

Nvidia, a leading company in AI, will report its fiscal second-quarter operating results on Aug. 27. The company has been experiencing steady growth, with its stock seeing an approximately 1,100% increase since the start of 2023. However, the company's growth has been highly dependent on investor euphoria surrounding the evolution of AI.

The advent of the internet, like AI, also endured early-stage bubble-bursting events. Similarly, Nvidia's persistent AI-GPU scarcity has allowed it to command a premium price for its hardware. But this scarcity may be changing, as internal chip development by Nvidia's top customers is working against the AI-GPU scarcity that Nvidia has held dear.

Nvidia's GAAP gross margin reached a high of 78.4% during the first quarter of fiscal 2025 due to AI-GPU scarcity. However, the company has been experiencing steady gross margin erosion for over a year. This erosion is expected to continue, with Nvidia's P/S ratio expected to decline slightly when it reports projected year-over-year sales growth of 53% in the fiscal second quarter. Despite this decline, the P/S ratio will still be above historically sustainable levels.

The Shiller price-to-earnings (P/E) ratio of the S&P 500, which includes Nvidia, has reached its third-highest multiple during a continuous bull market when back-tested 154 years. Previously documented occasions when the stock market was this expensive were followed by declines of 20% or more in the benchmark S&P 500.

Nvidia's Hopper (H100) and Blackwell GPUs have been deployed more than any other chips in high-compute data centers. However, the company faces competition from key players like AMD and Intel. AMD is Nvidia's sharpest competitor among established chip firms offering technically comparable AI chips but lagging in software. Intel, despite having internal design and manufacturing capabilities, still trails in AI chips. Both AMD and Intel could potentially threaten Nvidia's market share, especially as Nvidia relies on external foundries like TSMC, which use advanced manufacturing processes.

The economic impact of AI is projected to reach $15.7 trillion by 2030, according to PwC analysts. However, most businesses aren't yet optimizing their AI solutions, nor are many generating a positive return on their AI investments. This suggests that investors may have overestimated the impact of artificial intelligence in the early stages.

As Nvidia prepares to report its fiscal second-quarter results, the company's future remains uncertain. The market's reaction to the report could provide insight into the sustainability of Nvidia's growth and the broader AI market.