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How big is too big?
That's the question on a lot of investors' minds Wednesday as they wait for Nvidia to report earnings for the fourth quarter of 2023 after the market closes.
The California-based chipmaker has quickly become the third largest company on Wall Street behind Microsoft and Apple, largely because of its critical role in the artificial intelligence boom – Nvidia makes up nearly all of the AI chipmaking market in the United States.
But with a market cap of $1.7 trillion and a year-to-date return of about 40% (the best in the S&P 500), the company has a lot to live up to.
Investors expect Nvidia to report earnings of $4.59 a share and $20.378 billion in revenue, up from just $6.05 billion a year before.
"There's a very realistic and probable chance they beat expectations but zero percent chance they meet the sentiment of those expectations," said Daniel Newman, CEO of The Futurum Group , a tech advisory and research firm, noting that investors have come to expect huge earnings beats and the outsized hype around the company.
Still, there's some concern about whether this can last.
Shares of Nvidia have quintupled since the end of 2022 as the AI revolution took hold, and it's hard to imagine that such stratospheric growth can go on forever.
"It's the law of large numbers," said Newman. "If you keep posting these remarkably strong quarters they start to look smaller." Plus, he said, competition is emerging, albeit slowly. There's plenty of room for growth ahead, just maybe not at the sky high rate investors have grown used to.
Too big to fail: For the time being, Nvidia is the "most sophisticated and deployed" chipmaker in the world, and its output is one of national importance, said Newman.
"From a national security standpoint, [the US] needs to be the leader in AI," said Newman. "The economic future of the world depends on AI, and we can't let China have the most advanced chips."
That's the reason the US has invested $200 billion into the CHIPS and Science Act.
While there's competition from companies like Intel and AMD, Nvidia remains the biggest game in town for now.
And because of its rapid growth, so many retirement savings accounts, institutions and life savings are heavily invested in the company's success.
At the recent World Government Summit in Dubai, Nvidia CEO Jensen Huang even suggested that governments should consider instituting sovereign AI infrastructure.
That's the idea that states should control the development of AI technology to best protect their national security, economy and culture as opposed to leaving corporations in charge.
TL;DR: "Nvidia is robust and will continue to grow," said Newman. "But it needs to continue at a rate that's eye watering or investors will start looking at other plays."
What's next: Wednesday is Nvidia's big day, but Intel also has plans to share the spotlight.
OpenAI founder Sam Altman, who is reportedly working on his own chip-making venture, will join Intel CEO Pat Gelsinger on stage at a company event. Investors will certainly be watching closely for any announcements.
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