Nvidia's dominant position in artificial intelligence chips has fueled massive growth and stock price gains in 2022, but the company must manage lofty expectations to sustain its rally.

Nvidia's AI Chip Dominance Drives Record Growth

Nvidia's blows past earnings expectations in recent quarters, led by its graphics processing units (GPUs) that power artificial intelligence services like ChatGPT. The company holds over 80% market share in AI chips, enabling it to ride the AI boom.

In May, Nvidia forecast Q2 revenue 50% above expectations, pushing its market cap over $1 trillion. This made NVDA the top S&P 500 performer this year, with shares tripling in value. The company's upbeat guidance also boosted AI stocks and Big Tech names.

"Nvidia and the AI story is what is driving the market right now," said Dennis Dick, a market structure analyst. "To keep the stock price where it is, we would want to see bottom line start to support those share gains," added Brian Mulberry, a portfolio manager.

Looming Q3 Report Carries High Expectations

Nvidia is scheduled to report Q3 earnings on August 24, and expectations are sky-high. Analysts predict 110% revenue growth to $12.5 billion, nearly double last year's total.

The upcoming report "might be the most important of this earnings season," said Dick. "We want to hear that they can build on the amazing quarter they had last quarter."

Nvidia's guidance will indicate if its AI-fueled growth is sustainable. "If Nvidia were to miss (expectations), this market would be in a world of pain," Dick warned. A shortfall could halt the stock's meteoric rise.

Nvidia Must Carefully Manage Expectations

Nvidia faces a delicate balancing act with its Q3 report. While its AI chip dominance points to strong growth, expectations may be unrealistic.

"To justify its valuation, Nvidia needs to post very strong growth numbers," said Mulberry. "If they guide conservatively, we could see a sharp stock pullback."

Nvidia must communicate a vision that sustains its rally while managing Wall Street's forecasts. "With the stock up so much this year, there is risk of volatility if Nvidia disappoints in any way," Mulberry noted.

Careful messaging and demonstrating AI leadership will be key for Nvidia to maintain its altitude. So far, its execution has propelled it to unprecedented heights.

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