From the initial public offering (IPO) at the beginning of 1999 till last year, NVIDIA Corporation NVDA has given an annualized compounded return of 33%, the best growth rate in the past two decades of trading in U.S. stock exchanges.
This year, NVIDIA joined the Dow as it became the barometer of the expanding artificial intelligence (AI) industry, and is currently the most valuable company. NVIDIA’s shares have soared 186.8% this year.
Therefore, market participants are eagerly anticipating NVIDIA’s third-quarter fiscal earnings report, which could significantly impact its share price and the broader tech sector.
They are contemplating selling NVIDIA’s shares and booking profits or buying them hoping for better future returns. Let us thus look at how investors should play the NVIDIA stock ahead of its earnings.
AI server components are necessary for NVIDIA’s AI-related products, and any operational disruptions from suppliers may impact the semiconductor giant’s fiscal third-quarter results.
Regarding such suppliers, Super Micro Computer, Inc.’s SMCI financial instability and recent criticism from Hindenburg Research raised concerns about the company’s capabilities to meet NVIDIA’s demands.
However, the increasing adoption of AI and several other data-intensive applications would boost NVIDIA’s AI and data center business in the fiscal third quarter.
The increase in demand for graphic processing units (GPUs) among Meta Platforms, Inc. META and Microsoft Corporation MSFT, to name a few, should continue to improve NVIDIA’s operational profitability in the reporting quarter.
NVIDIA anticipates an 80% surge in sales to $32.5 billion in the reporting quarter due to strong demand for current-generation Hopper GPUs. The company is projected to report earnings per share of $0.74 for the fiscal third quarter, up over $0.40 from the previous year, showing an 85% increase.
NVIDIA’s average four-quarter earnings surprise is a positive 12.7%, implying that it has a fair chance to display earnings growth in the upcoming earnings release on Wednesday, after the bell, likely impacting its stock positively.
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Encouraging fiscal third-quarter earnings reports may have a short-term positive impact on the share price. However, several other factors may lift NVIDIA’s share price in the long run.
On the third-quarter earnings call, NVIDIA is expected to share positive news about its much-awaited next-generation Blackwell GPU, demand for which is already insane, per CEO Jensen Huang. The new B200 chips have more AI throughput than H100 chips and have already been booked for the next 12 months, claimed management.
While Blackwell GPUs are poised to generate high revenues from the fourth quarter onward due to increased production, capital expenditures rising among NVIDIA’s customers should also enhance profit margins and raise the stock price. For instance, Amazon.com, Inc. AMZN and Meta expect their capital expenditures to increase to $75 billion and $40 billion in 2024 due to an increase in AI demand.
Anyhow, NVIDIA’s strong fundamentals make it the most valuable company, unswervingly boosting its share price. NVIDIA has steadily increased its cash flow and is expected to witness notable growth from Blackwell-related revenues.
The company’s free cash flow jumped from $4.3 billion in FY20 to $26.9 billion in FY24. This helped NVIDIA settle obligations and expand business through reinvestments.
NVIDIA has efficiently managed its expenses since it has a net profit margin of 55%, higher than the Semiconductor – General industry’s 47.3%. Any reading above 20% shows a high profit margin.
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NVIDIA also generated profits proficiently as its return on equity (ROE) of 120% surpassed the industry average of 78.3%, indicating that its net income exceeds equity.
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NVIDIA’s strong cash flows, capability to make profits competently, manage costs efficiently, increase in customer’s capital spending, rising demand for Blackwell, and projected year-over-year uptick in third-quarter earnings are expected to drive up the NVDA stock value, presenting an attractive buying opportunity (read more: This Is Why NVIDIA Joined the Dow; And Why It’s Time to Buy).
Additionally, buying the NVDA stock won’t burn a large hole in your pocket. Per the price/earnings, the NVDA stock trades at 49.4X forward earnings, less than the industry’s 58.5X forward earnings multiple.
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NVIDIA currently has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks Rank #1 stocks here.
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