Nvidia, the world's most valuable chipmaker, is set to release its earnings report on Wednesday night. This event holds significant importance as it provides investors with a clear view into the state of the AI boom. Since the last financial report in late August, the enthusiasm for AI has driven stock market gains, and Nvidia is at the forefront of this trend.

Unraveling Nvidia's Earnings Impact on Wall Street

Overheated or Overdone?

Investors are keen to know if the rollout of Nvidia's next-generation AI chip platform Blackwell has encountered any issues. A recent media report suggesting potential overheating in a certain configuration has raised concerns about a slower revenue ramp. However, CEO Jensen Huang's description of Blackwell demand as "insane" gives confidence. The uncertainty lies in the timing of the ramp. Nvidia expects to ship "several billion dollars" in Blackwell sales this quarter, but analysts project companywide revenue of $37.04 billion. Nvidia's guidance is crucial in shaping Wall Street's reaction. As Jim Cramer said, if there were no competitors, there's no need to fret about delays. But if there are, we need to be prepared.

Analysts at Truist Securities acknowledge potential technical and supply chain challenges. Yet, everything they hear from Nvidia and its partners is overwhelmingly positive. They believe any slippage in Blackwell will be offset by Hopper, providing downside protection. Hopper is Nvidia's current-generation AI chip, and its performance is crucial in maintaining the company's growth.

Margin Health?

Nvidia's triple-digit revenue growth is expected to moderate due to the law of large numbers. Gross margins have become increasingly important. In the August quarterly report, the guidance for gross margin was one of the few areas of concern. Analysts at Bank of America advise keeping an eye on gross margin. Nvidia needs to report in the 73% to 74% range to meet earnings per share targets for fiscal 2026.

To calculate gross margin, subtract the costs of revenue from revenue to get gross profit. Gross profit divided by sales multiplied by 100 gives the gross margin percentage. In Nvidia's most recent quarter, the gross margin was 75.7%. The rollout of Blackwell is seen as a factor pressuring margins in the near term. Susquehanna analysts expect margins to decline to the low 70s as Blackwell ramps with initially lower yields.

Sovereign and Software Strength?

Nvidia's CEO, Jensen Huang, has been visiting countries like Japan, Indonesia, India, and Denmark to promote AI and discuss sovereign initiatives. These trips are part of Nvidia's broader strategy on sovereign AI, which aims to give countries control over their computing infrastructure and data. Nvidia expects sovereign AI to generate low double-digit billions in revenue this fiscal year. Updates on this projection will be welcome.

U.S. tech giants are also investing heavily in AI computing infrastructure, which is good news for Nvidia. Software is another long-term bet that can offset hardware sales cyclicality. In August, CFO Colette Kress said Nvidia was on track to reach a $2 billion annual run rate for software and support revenue. AI Enterprise, Nvidia's software offering, is contributing significantly to this growth.

Nvidia's CEO Jensen Huang delivers his keystone speech ahead of Computex 2024 in Taipei on June 2, 2024. Sam Yeh | AFP | Getty Images