Nvidia has been benefiting from a number of good factors for some time, including strong pricing power due to high demand for its chips and tight supply, which has helped the company achieve gross margins of over 70%. The chipmaker reported fiscal second-quarter earnings after the close on Wednesday that beat market expectations, although the stock fell in intraday trading Thursday as investors hoped for a bigger gain. Looking ahead, one fund manager highlighted a sign that investors should pay close attention to, which could signal the beginning of an erosion of Nvidia’s pricing power and margins. The signal is capital expenditures from so-called “hyperscale companies” such as Microsoft, Google and Amazon. Several major tech companies have released their June quarter earnings reports, which show rising spending, particularly on artificial intelligence – which includes Nvidia-designed graphics processing units. These are the world’s largest cloud computing players, and they have been expanding their infrastructure to train artificial intelligence models. Microsoft said capital expenditures increased more than 77% year-on-year in the June quarter to $19 billion. Meanwhile, Google parent company Alphabet said its capital expenditures increased by more than 90% in the second quarter compared with the same period last year. Tech giants have said high spending on artificial intelligence is likely to continue. NVDA 1Y Peaks Nvidia “As long as this continues, you can expect Nvidia’s current margin situation to continue,” Musketeer Capital Partners founder Josh Koren told CNBC’s “Street Signs Europe” on Wednesday ” stated in the program. “But when we start to see those capex guidance come down … that’s how you know pricing starts to come down,” he added. He said that might not happen in the current quarter, but it could happen in the near future: “I wouldn’t be surprised to see it happen maybe in the next two or three quarters.” He added that when this happens When that happens, Nvidia’s stock price could fall by 20% or more. Coren and his company do not own Nvidia stock. Analysts see Nvidia’s average upside potential at 15.8%, according to Thursday’s FactSet data. Of 61 analysts, 92% have a buy or overweight rating on the stock. Nvidia now faces increasing competition from the likes of AMD, but many analysts still believe the company has a strong position to fend off rivals. Yang Wang, senior research analyst at Counterpoint Research, said Nvidia will receive most of its funding from cloud companies in the next two to three years as cloud companies continue to increase capital expenditures. “We estimate that Nvidia will still account for the majority of the $700 billion in capital expenditures over the next two and a half years. So Nvidia’s outlook should remain strong,” Wang said on CNBC’s “Squawk Box Europe” on Wednesday.
