Nvidia earnings: market braces for potential volatility

Anticipating Nvidia's Q4 earnings report​​

Nvidia's earnings on Thursday, 27 February at 8:20am AEDT, marks one of the most anticipated releases of the year. Investors are closely monitoring whether Nvidia can continue its remarkable growth trajectory. Given the company's central role in powering artificial intelligence (AI) infrastructure, its performance serves as a bellwether for the broader tech sector.

Whether you're looking to trade the immediate volatility or position for longer-term trends, this announcement represents a critical inflection point.

Key expectations

Wall Street is expecting Nvidia's revenue to reach $38 billion, marking a staggering 72% year-over-year (YoY) increase. Earnings per share (EPS) are projected to rise 62% to $0.84, setting a high bar for the AI chip giant to clear.

​With expectations already at stratospheric levels, Nvidia must deliver exceptional results to maintain its momentum. The company has consistently outperformed, exceeding consensus estimates by an average of $1.8 billion over the past five quarters.

​The stakes couldn't be higher for traders watching this earnings release, with options markets suggesting an 8% move in either direction. This translates to a potential $300 billion market capitalisation swing – a figure larger than most companies in the US 500.

Blackwell chips: the critical factor for future growth

​Nvidia's upcoming Blackwell architecture represents the next generation of AI chips and is expected to drive future growth. However, uncertainty regarding supply chain constraints and potential production delays has created significant variance in analyst forecasts.

​Revenue estimates for the fourth quarter (Q4) range widely from $30 billion to $37 billion, reflecting uncertainty over how much the Blackwell rollout will contribute. Chief Executive Officer (CEO) Jensen Huang has described demand as 'insane,' but analysts fear that delays could lead to weaker near-term revenue.

​Possible timing issues with Blackwell could create margin pressures as Nvidia navigates the transition from its current Hopper architecture. Any signs of production setbacks would likely impact guidance and could trigger volatility in the share price.

​Investors will be parsing every word of the earnings call for clues about Blackwell's production capacity, expected shipping dates, and how quickly data centre customers plan to adopt the new technology. These details will be crucial for determining Nvidia's growth trajectory through 2025.

Options market signals heightened volatility

​The options trading market is pricing in significant post-earnings volatility, with the implied move around 7-8%. This is slightly lower than previous February quarters but still reflects investor uncertainty about Nvidia's outlook.

​Historical patterns suggest caution, as Nvidia's actual stock movements haven't always justified elevated options pricing. Over the last ten earnings reports, options straddles have frequently been overpriced, with the stock failing to move as dramatically as anticipated.

​Last February's earnings announcement triggered a 16.4% surge in Nvidia's stock price, but the November 2024 report resulted in a mere 0.53% movement. This inconsistency makes it challenging for traders to develop reliable strategies around earnings volatility.

​Given Nvidia's nearly 200% gain over the past year, many traders are using options to either hedge existing positions or speculate on the earnings outcome. Put-call ratios suggest a slightly cautious stance, with more investors purchasing downside protection than in previous quarters.

Potential market-wide impact of Nvidia's report

​Nvidia's dominance in AI extends well beyond its own share price, with the company's $3.3 trillion valuation giving it outsized influence across global markets. Its performance directly impacts the entire tech sector, particularly hyperscalers increasing AI infrastructure spending.

• AI investments: ​a strong report from Nvidia would likely fuel continued optimism about AI's economic potential, potentially boosting related stocks in semiconductors, cloud computing, and software. Conversely, any disappointment could trigger a broader reassessment of AI investment timelines
• Major cloud providers: including Microsoft, Amazon, and Google have committed billions to AI infrastructure, with Nvidia as their primary chip supplier. Their stock market performance is increasingly tied to Nvidia's ability to deliver cutting-edge chips on schedule
• ​Institutional investors: are closely watching this earnings release for indications of whether AI spending remains robust or shows signs of peaking. The results could influence capital allocation decisions across the technology industry for months to come.

​Investor scenarios

​The market is expecting near-perfection from Nvidia, leaving little room for error. If the company beats expectations and raises guidance, we could see a strong rally, though profit-taking might limit gains given the stock's recent performance.

​A scenario where Nvidia merely meets expectations without providing strong forward guidance could result in a flat or negative reaction. With optimism already priced in, merely delivering on consensus forecasts may not be enough to drive further appreciation.

​The most concerning outcome would be a miss on expectations or lower guidance, potentially triggering a sharp selloff of 10% or more. Such a scenario would force the market to reassess Nvidia's AI leadership and the broader technology investment thesis.

​Key metrics to watch

• Gross margins (previously around 75%)
• Data centre revenue growth rates
• Any commentary on pricing trends
• Potential regulatory risks, particularly regarding China export restrictions that could impact revenue.

​Given the high stakes surrounding this earnings report, implementing appropriate risk management strategies is essential. Using stop losses, position sizing, and potentially hedging with options trading can help mitigate downside risk while maintaining exposure to potential upside.