Nvidia is expected to be the biggest contributor to Q3 corporate profits. 'The bar is very high,' analyst says

By Bill Peters

Earnings Watch: Along with Nvidia, Zoom and other retailers report this week

Shares of chip maker Nvidia Corp. are up more than 240% this year, helped by this year's AI boom and record quarterly results. The company, worth around $1.2 trillion now, is big enough that it is expected to be the largest driver of profit growth for the S&P 500 index SPX overall for the third quarter.

But to keep that rally going, Nvidia (NVDA), which reports third-quarter results on Tuesday, will have to get past some already-lofty expectations.

"In short, we expect nothing short of another strong quarter for NVDA, but think investors are already expecting this (i.e., the bar is very high)," Susquehanna Financial Group analysts said in a research note on Thursday.

Nvidia has worked for a long time developing chips that power a lot of AI functions, but even amid expectations for through-the-roof third-quarter results, the list of questions faced by the company has gotten longer.

Businesses have been restrained on their technology spending. Wall Street has begun poking around at the costs businesses developing AI -- and those paying for it -- will have to shoulder to invest in the technology. And after a rush of enthusiasm for all things AI earlier this year, the Street is now grappling with the possibility that the financial rewards from AI development could take longer than once expected. Those rewards, at the moment, have been limited to a few companies, amid what one analyst described as a bifurcation into "contenders and pretenders," MarketWatch noted last month.

For Nvidia specifically, the company faces analyst concerns about stricter U.S. restrictions put in place last month on tech and chip exports to China, a nation that drives a big chunk of Nvidia's data-center sales. Nvidia said those export controls -- intended as a check on China's technology, AI and military goals -- would affect some of its circuits and risked creating production delays.

Still, the company said "we do not anticipate that the additional restrictions will have a near-term meaningful impact on our financial results," given the current state of strong demand. But Nvidia has faced questions about whether it has the production capacity to meet that demand. Susquehanna said supply has "improved considerably" for the company. The picture will become clearer on Tuesday.

The chip maker's earnings are also likely to play a not-insignificant role in profits for the S&P 500 Index overall.

"NVIDIA is also expected to be the largest contributor to earnings growth for the entire S&P 500 for Q3," FactSet Senior Earnings Analyst John Butters said in a report last month. "If this company were excluded, the blended earnings decline for the S&P 500 for Q3 would increase to -1.8% from -0.4%."

Eleven S&P 500 companies are set to report results this week, according to a FactSet report on Friday.

The call to put on your calendar

Zoom results: Zoom Video Communications Inc., the video-call platform, reports quarterly results on Monday, following a slip in its stock price this year and more muted sales growth since its days as a pandemic staple for many office workers. But amid the debate over return-to-office policies, the company has tried to adapt, expanding its offerings to phones, document collaboration services and other features intended to make hybrid work work more smoothly. Still, the company earlier this year cut staff. Benchmark analyst Matthew Harrigan on Friday said that "we do not expect much instant gratification on share price performance until revenue growth reaccelerates," but said the stock's current levels undervalue its market position.

The numbers to watch

Any hope for clothing retailers? Last week's results from Gap Inc., Macy's Inc. and Ross Stores Inc., along with remarks from Target Corp. executives, offered what could be considered tempered, qualified optimism for clothing retailers, which have been on the wrong side of higher prices for more than a year.

This week, as many more clothing retailers report, we'll get a deeper sense of whether the space is on the rebound, closer to the bottom, or still stuck somewhere in between, as Wall Street and retail executives proceed with caution.

Office-price chain Burlington Stores Inc. (BURL), department store Kohl's Corp. (KSS) and sports-gear chain Dick's Sporting Goods Inc. (DKS) report during the week. So do Abercrombie & Fitch Co. (ANF), Urban Outfitters Inc. (URBN) and Nordstrom Inc. (JWN). Those results will arrive following a year in which higher prices for food and other essentials have meant lower demand for things like clothing and electronics, forcing retailers to cut prices for those items and dinging sales and profits.

Walmart Inc. (WMT), however, predicted falling prices up ahead, which, while not great for short-term quarterly financials, is better for consumer budgets longer-term. Target (TGT) also said that as prices for basics fall, customers would have more flexibility to spend on more discretionary items, which tend to carry fatter margins. And in October, sales at clothing stores crept higher, according to government data. Shares of smaller retailers -- like Gap (GPS), Macy's (M) and Ross Stores (ROST) -- also rallied last week following quarterly results, albeit off of low expectations.

Still, executive commentary from those chains was muddier.

While Gap cited firmer pricing for clothing, after a year of industry-wide discounts to juice demand, executives signaled still-soft holiday-season trends up ahead. Ross' (ROST) chief executive said "customers responded favorably to the terrific values we offered," but noted "macroeconomic volatility." Macy's, meanwhile, offered only a slightly more upbeat full-year sales forecast, narrowed its profit outlook, and noted likely "pressure" on consumers during the holidays, following a third quarter of what it said were "healthy" inventories and a strong showing for items like sportswear and tailored clothing.

When food prices shot up last year following Russia's invasion of Ukraine, retailers rushed to sell off those inventories -- or the unsold items in warehouses and stockrooms -- partly in an effort to stock up on things people actually wanted to buy. But TD Cowen analyst John Kernan said that even as inventories grow thinner year-over-year at some retailers, those stockpiles still up compared to pre-pandemic levels.

"Their promotions are higher than what we would have expected at this point," he told MarketWatch. "I think that's because demand is still below supply in a lot of cases."

-Bill Peters

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11-20-23 0645ET

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