Artificial intelligence (AI) chip giant NVIDIA (NVDA.US) is set to announce its fiscal year 2026 second quarter results on August 27, Eastern Time. Morgan Stanley released a research report stating that NVIDIA's demand, supply, and competitive prospects for the next 12 months remain highly favorable. Morgan Stanley maintains its "Overweight" rating on NVIDIA and raises its target price from $200 to $206. This target price represents nearly 13% upside from the stock's Monday closing price.
Morgan Stanley noted that market expectations have risen ahead of NVIDIA's earnings report, which is reasonable. The firm expects NVIDIA's second quarter results and guidance to be strong. However, Morgan Stanley added that its optimism about NVIDIA is more focused on the future.
The firm stated that while demand continues to improve, supply remains a limiting factor, and its revenue forecasts for NVIDIA depend on the production pace of Blackwell chips. The firm expects NVIDIA's third quarter revenue to benefit from accelerated Blackwell chip shipments.
Morgan Stanley raised its second quarter revenue forecast for NVIDIA from the previous $45.2 billion to $46.6 billion, third quarter revenue forecast from $51.3 billion to $52.5 billion, and full fiscal year 2026 revenue forecast from $264.6 billion to $273.2 billion. Non-GAAP earnings per share forecast was raised from $6.28 to $6.51.
Morgan Stanley pointed out that on the demand side, NVIDIA's customers have used words like "stunning," "insatiable," and "massive" to describe demand during earnings conference calls. The tone of commentary from hyperscale customers has shifted: last year's focus was mainly on supply constraints, while now there is greater emphasis on surging inference demand and difficulty keeping up with capacity deployment. This is a positive signal for the sustainability of NVIDIA's revenue growth, even as Blackwell chips begin large-scale shipments.
Demand growth is primarily coming from NVIDIA's four major hyperscale customers. Additionally, second-tier cloud service providers and sovereign customers represent easily underestimated forces. For example, CoreWeave's capital expenditure is mostly concentrated in the second half of the year, with approximately 50% occurring in the fourth quarter. NVIDIA's customer base is expanding, and strong demand is no longer limited to top-tier clients.
On the supply side, multiple factors are improving. Rack assembly is accelerating, with Foxconn expecting third quarter rack shipments to triple sequentially. Morgan Stanley's Greater China hardware team expects the top four ODMs' third quarter rack shipments to double. Full-year rack shipments are projected at 34,000 units, corresponding to approximately 2.4 million GPUs, representing about $90 billion in revenue for NVIDIA. This only includes the top four ODMs and excludes other partners.
Testing bottlenecks are also easing. Shorter delivery cycles for Advantest testing machines are helping normalize testing times. Morgan Stanley analyst Charlie Chan expects B200/B300 chip testing volume to increase from 1 million units in the second quarter to 1.5 million units in the third quarter. However, the analyst issuing this report made relatively conservative predictions, forecasting B200/B300 chip testing volume to reach 1.2 million units in the third quarter and 1.42 million units in the fourth quarter.
Morgan Stanley added that in the second quarter, supply concerns extend beyond Blackwell chips. Currently, Hopper chip production has ceased, and while demand for these GPUs remains strong, it's difficult to determine whether there will be new purchases in July. The firm predicts Hopper chip second quarter revenue will decline 50% sequentially to around $2.8 billion. Additionally, increased B200 server shipments partially offset the gap. Overall, increased rack shipment proportions and the introduction of B300 may provide slight positive momentum.
Notably, regarding the Chinese market, Morgan Stanley expects NVIDIA's third quarter guidance to assume minimal contribution from the Chinese market. If licensing approvals accelerate, revenue from the Chinese market could see upside potential, but uncertainty remains about whether Chinese hyperscale customers will ultimately purchase H20 chips.
Morgan Stanley stated that three months ago, the firm was more optimistic than the market about both demand and supply improvements for NVIDIA. Although market expectations have been raised, the firm still believes NVIDIA will continue to gain market share in 2025 and maintain approximately 85% market share in 2026, defending against competition from ASIC sectors and AMD (AMD.US).
Morgan Stanley noted that NVIDIA's market share has increased significantly this year. Even ASIC's largest user (such as Google) is expected to see spending on NVIDIA grow more than threefold, while ASIC spending is only growing modestly. As NVIDIA's R&D investment surpasses $15 billion and expands into areas such as rack interconnects, software, and services, it becomes increasingly difficult for competitors to develop ASICs that outperform NVIDIA in mainstream tasks.
While AMD plans to launch rack-level solutions in 2026, its interconnect technology UALink will be introduced later, by which time NVIDIA will have moved to next-generation NVlink Rubin and provided customers with NVlink fusion technology. Therefore, while there may be windows for lower-cost alternatives, performance gaps remain the biggest competitive barrier.