Nvidia faces growth test as Rubin debut meets AI financing scrutiny

Nvidia's upcoming earnings report will assess if the company's new Rubin chips can fuel another surge in growth, as some investors raise concerns about the long-term viability of AI spending. The chipmaker has reaped the greatest benefits from the push to develop AI infrastructure, but its stock has faced pressure amid billions invested back into the ecosystem, raising worries about circular deals that could inflate demand and skew economic indicators.

Nvidia's shares have climbed 11.8% this year, trailing major rivals, and briefly fell behind Apple as the world's most valuable company.

Analysts forecast Nvidia's revenue for the second quarter will nearly double to $92.18 billion, the fastest growth in seven quarters, fueled by a more than twofold increase in data center sales. However, investors are now closely watching Nvidia's ability to shift customers from Blackwell chips to the upcoming Vera Rubin processors, with shipments expected to commence this autumn.

This growth is being driven by Big Tech's AI spending spree, topping $730 billion this year, and the massive outlays by smaller AI-focused cloud companies like CoreWeave, which are backed by Nvidia.

Concerns have grown over this spending, following Nvidia's role in arranging $500 billion in financing from six major U.S. financial institutions for AI infrastructure customers and guaranteeing up to $105 billion to help OpenAI lease a data center in Ohio for 20 years. Brian Mulberry, chief market strategist at Zacks Investment Management, noted Nvidia's role as a central bank in the AI space.

The real risk lies in excessive AI exposure without diversification, and the key to success is sustained adoption of AI tools. CEO Jensen Huang argued that Nvidia's use of its balance sheet to support AI buildouts is straightforward: the company has ample cash to aid customers who are growing quickly but still operating at a loss.

Nvidia defended the Ohio data-center backstop, stating that OpenAI would pay for the lease and that the company was merely financing and securing data centers, power supplies, and facilities to house its chips for decades. As competition intensifies from Big Tech's custom chips and Intel and AMD's central processors in inference, Morgan Stanley analysts estimate Rubin chips could generate nearly $9 billion in sales in the third quarter.

However, they expect it will take time to determine if Nvidia can capture market share from AMD and the custom AI chips being developed by major technology firms. Analysts anticipate Nvidia to forecast an 82.8% rise in third-quarter sales to $104.20 billion, with adjusted gross margins remaining around 75%.