An Analysis of NVIDIA (NVDA) Stock Before Q2 Earnings Release

Technology stocks have staged a massive recovery this year, with the Nasdaq rising nearly 27% year-to-date. Breakthroughs in AI, such as the advent of the large language model-based (LLM) chatbots, significantly drove the tech sector’s performance. The buzz around AI helped the Nasdaq jump 32% during the year's first half, registering its best first half since 1983.

NVIDIA Corporation (NVDA), playing a crucial role in the AI revolution, rallied more than 196% this year. The Santa Clara, California-based chipmaker has seen considerable investor interest in its shares, as its graphic processing units (GPUs) provide the necessary processing power to Generative AI applications. This AI boom has catapulted NVDA’s market capitalization to over $1 trillion, making it the sixth company to achieve that landmark.

NVDA founder and CEO Jensen Huang earlier this year said, “AI is at an inflection point, setting up for broad adoption reaching into every industry. From startups to major enterprises, we are seeing accelerated interest in the versatility and capabilities of generative AI.”

In addition to being a leader in providing advanced AI chips required for generative AI, NVDA is witnessing rising demand for its chips in accelerated computing.

The company’s GPUs are used in supercomputers and data centers. Its GPUs are used as accelerators for central processing units (CPUs). Huang said, “The computer industry is going through two simultaneous transitions – accelerated computing and generative AI.”

“A trillion dollars of installed global data center infrastructure will transition from general-purpose to accelerated computing as companies race to apply generative AI into every product, service, and business process,” he added.

NVDA is boosting the production of its entire data center range of products like H100, Grace CPU, Grace Hopper Superchip, NVLink, Quantum 400 InfiniBand, and BlueField-3 DPU to meet the rising demand for AI technologies. According to Wedbush, artificial intelligence will be worth $800 billion to businesses over the next ten years.

During the first quarter, the company reported record data center revenue of $4.28 billion. For the second quarter of fiscal 2024, NVDA expects its revenue to be $11 billion, plus or minus 2%. The revenue forecast was more than 50% higher than Wall Street estimates of $7.15 billion. The company expects non-GAAP gross margins to be 70%, plus or minus 50 basis points.

Deutsche Bank analyst Ross Seymore said, “We expect another stunning print & guide from NVDA, with demand for AI, compute still at ‘frenzied’ levels and expected to remain limited by supply for several quarters.” The analyst expects revenues of $11.05 billion and EPS of $2.05. He has a Hold rating on the stock with a $440 price target.

Forrester analyst Glenn O’Donnell said, “What Nvidia reports in its upcoming earnings release is going to be a barometer for the whole AI hype. I anticipate that the results are going to look really outstanding because demand is so high, and that means Nvidia is able to command even higher margins than it would otherwise.”

Street expects NVDA’s EPS and revenue for the second quarter ending July 31, 2023, to increase 309.1% and 65.8% year-over-year to $2.09 and $11.12 billion, respectively.

Here’s what could influence NVDA’s performance in the upcoming months:

Disappointing First-Quarter Results

NVDA’s revenue for the first quarter ended April 30, 2023, declined 13% year-over-year to $7.19 billion. Its non-GAAP operating income fell 23% year-over-year to $3.05 billion. The company’s non-GAAP net income declined 21% over the prior-year quarter to $2.71 billion. In addition, its non-GAAP EPS came in at $1.09, representing a decline of 20% year-over-year.

Favorable Analyst Estimates

Analysts expect NVDA’s EPS for fiscal 2024 and 2025 to increase 144.7% and 44.2% year-over-year to $8.17 and $11.78, respectively. Its fiscal 2024 and 2025 revenues are expected to increase 64.4% and 33.4% year-over-year to $44.33 billion and $59.16 billion, respectively.

Stretched Valuation

In terms of forward EV/EBITDA, NVDA’s 54.10x is 268.2% higher than the 14.70x industry average. Likewise, its 24.08x forward EV/S is 777.4% higher than the 2.74x industry average. Its 52.99x forward non-GAAP P/E is 131.4% higher than the 22.90x industry average.

High Profitability

In terms of the trailing-12-month net income margin, NVDA’s 18.52% is 821% higher than the 2.01% industry average. Likewise, its 23.53% trailing-12-month EBITDA margin is 162.8% higher than the industry average of 8.96%. Furthermore, the stock’s 6.65% trailing-12-month Capex/Sales is 174.3% higher than the industry average of 2.42%.

Bottom Line

NVDA remains well-positioned to capitalize on the multi-billion-dollar opportunity in artificial intelligence. Its graphic processing units (GPUs) are essential in powering generative AI tools. The company’s optimism over AI led to an impressive outlook for the second quarter.

Investors will be looking forward to the company’s second-quarter results on August 23, 2023. Despite the vast scope for NVDA, the stock has already rallied nearly 200% this year and is trading at an expensive valuation. Considering these factors, it could be wise to wait for a better entry point in the stock.