Nvidia's earnings report is set to be released tonight, marking a critical battle for the AI bull market. How should one trade it?
- Key Takeaway: Nvidia's earnings are highly likely to be strong, but the market's focus has shifted to whether it can address long-term concerns even after beating expectations, including Rubin-cycle growth potential, the circular financing controversy, gross margin pressure, and the competitive landscape. This earnings report is seen as a key litmus test for whether the AI bull market can enter its next phase.
- Key Elements:
- Earnings Expectations: Wall Street consensus expects quarterly revenue of approximately $92 billion, nearly doubling year-over-year; Jefferies projects $95 billion, but Goldman Sachs warns that merely "beating expectations and raising guidance" will not be enough to drive the stock price higher.
- Options Pricing: Implied volatility ahead of the earnings report is approximately 5.4%, the lowest since August 2021 and below the historical average of 7.4%; options buyers have overpaid in the past eight earnings cycles, and prices have begun to correct.
- Forecast Split: The market assigns a 96% probability of an earnings beat, but the probability of the stock closing above $220 after the report is only 43%; Nvidia's stock has shown a negative reaction after each of the past four earnings reports.
- Rubin Cycle: Rubin maintains the NVL72 rack form factor, allowing reuse of existing liquid-cooling deployment infrastructure, with assembly time expected to compress from 2 hours to 5 minutes; it is projected to become the dominant revenue source by Q1 of fiscal 2028, shifting the valuation narrative.
- Circular Financing Controversy: Nvidia has reached arrangements with SB Energy and OpenAI involving a 20-year lease, 4.25GW of capacity credit support, and a $1.5 billion investment; the five major cloud providers have committed over $3.1 trillion in financial support, raising concerns about "exchanging balance sheets for growth."
- Cost and Power Pressures: Nvidia has notified large customers that server prices will rise by more than 15% next year, primarily driven by higher HBM costs; the widening grid supply gap means the pace of converting orders into revenue will be non-linear.
- Competitive Risks: Google and Meta are advancing custom chip development, OpenAI and Broadcom have co-developed chips that surpass Blackwell in some benchmark tests, and new entrants like Cerebras are competing for market share; Nvidia's stock has become noticeably decoupled from the broader semiconductor sector.
Original Author: Xu Chao
Original Source: Wall Street CN
Nvidia's upcoming quarterly earnings report is likely to be another strong showing, but the market's question is no longer just "beat or miss" – it's whether the company can provide sufficient answers after the beat. From options pricing to institutional divergence, from the circular financing debate to power bottlenecks, this earnings report is becoming a litmus test for whether the AI bull market can enter its next phase.
On Wednesday after market close (ET), Nvidia will release its Q2 FY2027 earnings. Wall Street consensus expects quarterly revenue of approximately $92 billion, nearly doubling year-over-year; adjusted EPS is expected at $2.09, with data center revenue expected around $85.4 billion. Jefferies projects revenue will exceed consensus, reaching $95 billion; Citi has also raised its estimates while maintaining a $300 price target. However, Goldman Sachs warns that with the stock already up over 12% in August, "an earnings beat plus raised guidance" may not be sufficient to drive the stock higher – it also needs the simultaneous release of three positive catalysts: improving profitability among hyperscale cloud providers, manageable customer financing, and large-scale capital returns.
Options market pricing reflects this caution. According to ORATS data, Nvidia's implied move ahead of earnings is approximately 5.4%, the lowest since August 2021 and significantly below the historical average of 7.4% over the past 12 quarters.
ORATS founder Matt Amberson noted that across the past eight earnings reports, actual stock moves have been smaller than implied options moves, and "options buyers have been overpaying for event premium, and prices have begun to correct." This means that for investors bullish on the AI theme, relatively cheaper options offer an asymmetric entry window; but if management fails to answer the long-term questions the market truly cares about, the low volatility expectation could also be broken.
Divergence in Earnings Expectations: Both Bulls and Bears Have Conviction
Sell-side institutions are broadly optimistic about the current quarter's fundamentals, but divergence centers on the post-earnings stock price trajectory.
Jefferies expects Nvidia's July quarter revenue of $95 billion and October quarter guidance of approximately $108 billion, both above market consensus of roughly $91.9 billion and $103.7 billion. Morgan Stanley is relatively conservative, expecting approximately $91.2 billion for the July quarter and $102.3 billion for the October quarter, but believes quarterly revenue can continue to grow by roughly $10 billion sequentially. Citi maintains a Buy rating and $300 price target, noting Nvidia has secured HBM memory supply for 2026-2027, providing assurance for stable deliveries.
Morgan Stanley maintains an "Overweight" rating and top pick status with a $288 price target, pointing out that Nvidia's current forward P/E of roughly 17x FY28 is not expensive relative to its own history, semiconductor peers, or the broader market. However, the firm also emphasizes that over the past four quarters, Nvidia's stock has reacted negatively the day after earnings even with strong results – the market has already priced in "beating expectations" as the default script.
Prediction market data also reflects this split: the probability of Nvidia beating earnings expectations is priced as high as 96%, but the probability of the stock closing above $220 after the report is only 43%.
The Rubin Cycle: The Key Word for the Next Valuation Narrative
In the near term, Blackwell demand remains robust. Improvements in Microsoft and Amazon Web Services cloud businesses, along with OpenAI and SpaceX's long-term compute commitments, continue to support data center revenue confidence. But the market's gaze has shifted further ahead – whether the Rubin platform can open the next higher-base growth curve will be the core topic of this earnings call.
Jefferies believes Rubin's ramp could be significantly faster than Blackwell's early stages. The key reason: Rubin continues the 72-GPU Oberon NVL72 rack form factor, allowing it to reuse the liquid-cooled data center deployment and manufacturing infrastructure accumulated from GB200 and GB300. The new design also substantially reduces manual cabling and plumbing installation – management previously mentioned that compute tray assembly time could be compressed from roughly 2 hours to 5 minutes. The implication is that Nvidia is transforming AI chip upgrades into replicable, scalable "AI factory systems."
Jefferies projects that Rubin/R200 will account for approximately 12% of Nvidia's GPU revenue in Q3 FY2027, rising to over 40% in Q4, and becoming the dominant revenue source by Q1 FY2028. If this cadence materializes, the market's valuation logic will shift from "How much longer can the Blackwell cycle last?" to "Can Rubin unlock even larger-scale growth?"
Circular Financing: The Most Controversial Gray Area
The most likely market focus of this earnings report is Nvidia's increasingly complex financing arrangements with hyperscale customers.
According to Jefferies' analysis, Nvidia has reached an arrangement with SB Energy for the latter to build and operate the PORTS-Pike Technology Campus in Ohio, leased to OpenAI on a 20-year term, with Nvidia as the exclusive compute provider. Nvidia will provide credit support for the initial 4.25GW of IT capacity and hold options on the remaining 3.75GW, while also investing $1.5 billion in SB Energy. Nvidia states that each generation of system deployment at the site corresponds to approximately 1.5 million GPUs, generating $150-200 billion in revenue; OpenAI's existing and planned commitments total approximately 12GW, expandable to 16GW, corresponding to roughly $600 billion in Nvidia compute purchases by 2030.
However, Morgan Stanley data shows that the five largest hyperscale cloud providers, together with Nvidia and Broadcom, have committed over $3.1 trillion through guarantees, leases, and other forms of financial support to drive AI infrastructure spending by other enterprises. This "vendor circular financing" model has become a key topic of scrutiny for institutions like Goldman Sachs: How much of this demand is genuine customer capex, and how much requires Nvidia to drive it through credit support or investments?
Morgan Stanley believes financing, market share, and gross margins are the three most contentious points investors are focused on. If management cannot provide clear accounting disclosures on contingent obligations and residual value commitments, market concerns about "exchanging the balance sheet for growth" will be difficult to dispel.
Gross Margin and Power: Two Hidden Pressure Lines
Gross margin is one of the core supports for Nvidia's valuation premium.
Morgan Stanley expects the company to maintain its "mid-70s" gross margin language for FY2027, with manageable near-term pressure. But medium-to-long-term pressure cannot be ignored: costs for HBM, DRAM, advanced packaging, substrates, and front-end wafers continue to rise, and new product ramps typically come with yield and supply chain teething issues.
Morgan Stanley cautions that consensus expectations for a significant gross margin recovery in the second half of FY2028 may be somewhat optimistic. Additionally, Nvidia has notified major customers including Microsoft, Google, and Oracle that server prices for systems with Vera Rubin and Grace Blackwell chips will rise over 15% early next year, driven primarily by higher HBM memory costs.
Power supply is also becoming a constraint that cannot be ignored.
Jefferies points out that the gap between chip demand expectations and grid supply capacity is widening. Large cloud providers are increasingly partnering with utilities to build dedicated gas-fired power plants, while frontier AI labs are increasingly adopting "behind-the-meter" power solutions to bridge the timing gap between grid interconnection and compute deployment. Gas turbines, backup power, and fuel cells are all being pursued, but equipment delivery lead times, grid interconnection approvals, and local regulations all affect data center construction timelines. This means the pace of converting orders into revenue will become less linear.
Competitive Landscape: Structural Risk to Market Share
Beyond the macro narrative, Nvidia's roughly 90% share of the AI accelerator market faces attacks from multiple fronts. Google, Meta, and other cloud giants are accelerating their in-house AI chip efforts; OpenAI's "Jalapeño" inference chip, co-developed with Broadcom, has reportedly surpassed Nvidia's Blackwell on certain benchmarks; and emerging chip companies like Cerebras Systems went public this year, also competing for market share.
Bespoke Investment Group notes that Nvidia's stock performance has become clearly disconnected from the semiconductor sector, "over the past several months, semiconductor stocks have repeatedly moved in the opposite direction of Nvidia." The PHLX Semiconductor Index has remained subdued since its late-June high, and Nvidia's recent seven-day losing streak was also its longest consecutive decline since this bull market began in October 2022.
These structural changes in the competitive landscape may become risk variables that transcend any single quarter's earnings figures and have a more profound impact on Nvidia's long-term earnings trajectory. Management's commentary on the competitive situation will be the part investors least want to miss on the earnings call.
