Contemplating Purchasing Nvidia Shares Prior to Nov. 20? Financial Experts Offer a Convincing Viewpoint.
Among the significant transformations in the tech sector over the recent years is the progress in artificial intelligence (AI). A significant argument suggests that the emergence of AI late the previous year served as one of the primary catalysts for the current market surge. ChatGPT introduced the concept of creative AI, leading to a 46% increase in the S&P 500 and a 67% surge in the Nasdaq Composite (as of the current writing).
Various entities benefited from these sustained growth patterns, with one of the most notable being Nvidia (NVDA -0.67%). Nvidia's graphic processing units (GPUs), initially developed for generating high-definition images in video games, have also proven effective in powering AI models.
The enhanced demand for Nvidia's chips led to exceptional earnings and skyrocketing stock prices. Since the beginning of the previous year, Nvidia's stocks have increased by more than 900% (as of market closing on Thursday).
With its financial results set to be declared next week, Nvidia carries significant expectations. Let's examine the factors leading up to this critical quarter, the Wall Street forecasts, and the expectations of investors.
Aurora Borealis Analysis
As AI's potential started to gain recognition in early 2023, interest in Nvidia's AI-centric processors exploded, from zero to 60 in just a few months. In the fiscal year 2024's second quarter (ending in July 30), Nvidia reported record revenue of $13.5 billion, up 101% year-over-year, and an adjusted EPS of $2.70, which soared 429%. On a GAAP basis, the EPS increase was even more astounding, up 854%.
The success continued in the subsequent quarters, with impressive, triple-digit sales and profit growth in each one. Nvidia's fiscal 2025's second quarter (ending July 28) was the zenith of this streak. Record revenue of $30 billion experiencing a 122% year-over-year growth, and adjusted EPS of $0.68 overshooting by a phenomenal 152%. Although concerns about the company's gross margin arose due to a record high in the second quarter, it still represented progress.
Investors knew that Nvidia's triple-digit streak would eventually come to an end, and management predicted this time had arrived. For the upcoming third quarter (ending October 29), Nvidia is projecting revenue of $32.5 billion, representing a 79% year-over-year increase.
The stock initially declined on the news, suggesting a slowdown compared to its recent growth rate. However, the stock has recovered and is once again near record highs.
Nvidia's future results are heavily dependent on the upcoming release of its AI-centric 'Blackwell' architecture. Following production delays, management confirmed that the chips would be available by the end of the year. CEO Jensen Huang mentioned in an interview that demand for the processors was "insane." He stated further, "Everyone wants to have the most, and everyone wants to be first." According to CFO Colette Kress, the company expects to generate several billion dollars in Blackwell revenue in the fourth quarter.
Nvidia's strong history of innovation keeps the company at the forefront of the AI revolution, and it seems this trend is continuing.
The Wall Street Chorus
Before Nvidia releases its financial reports next week, Wall Street remains optimistic. Analysts' consensus forecasts suggest revenue of $33 billion, representing 82% growth. Nvidia has a history of exceeding its own projections and those of Wall Street, so the results might be even more impressive.
As of November, 94% out of 63 analysts recommended buying or strongly buying the stock, with none recommending selling. The average price target of $157 indicates the potential for a 11% increase. The supportive consensus buy rating and higher-than-current stock price suggest potential upswings, although likely not to the same extent as the previous year.
In recent days and approaching Nvidia's earnings announcement, analysts have updated their models, resulting in numerous price target increases (12, as of my count). Each of these revisions exceeded the current consensus price target of $157, indicating that analysts are growing increasingly optimistic.
The majority of analysts attributed this optimism to the rapid adoption of AI and the construction of larger data centers to manage the escalating demand. Analysts felt that Nvidia's guidance was conservative, giving the company room to surpass expectations.
One of the more enthusiastic analysts, Melius Research's Ben Reitzes, upheld a buy rating and increased his price target to $185. "We find it challenging to believe that the enthusiasm for Jensen Huang's future chip has waned," he wrote in a note to clients. "For investors considering selling the stock, giving up on Nvidia at this stage is analogous to abandoning Apple during the iPhone's initial stages or 2." He concluded by stating that this represented a once-in-a-lifetime opportunity, describing Nvidia as an essential investment.
Wall Street continues to have a positive outlook on Nvidia, and for a valid reason. Even the most humble forecasts for the market potential of generative AI start at a whopping $1 trillion, with many estimates being significantly higher. So far, Nvidia's competitors have failed to develop a product that competes with Nvidia's GPUs in terms of performance, making Nvidia's GPUs the backbone of the AI revolution.
To make things clear, I'm optimistic about Nvidia and think the stock has room to grow even more. However, I'm also aware of the price fluctuations that are likely to occur in the near future. In the past summer, Nvidia stock fell by 27% in just a few weeks, only to recover and hit new all-time highs.
Lastly, let's talk about valuation. Wall Street anticipates that Nvidia will record EPS of $4.16 in its fiscal 2026, which starts in late January. That means the stock is currently trading at approximately 34 times next year's earnings. Although this is a slight premium, take a look at Nvidia's historical data. Over the past five years, Nvidia's revenue has skyrocketed by 868%, while its net income has jumped by an incredible 1,650%. This explosive growth has driven a 2,610% increase in the stock price (as of now). This clearly demonstrates why Nvidia deserves a premium.
We'll have a better understanding once Nvidia releases its financial results, which will be available after the market closes on November 20th.
After witnessing Nvidia's impressive financial performance, many investors are considering where to allocate their money. With the company projected to generate several billion dollars in revenue from its upcoming 'Blackwell' architecture, there's potential for substantial returns on investing in Nvidia's stocks.
Given the market's optimism towards AI, Nvidia's GPUs, which are deemed crucial for powering AI models, present an attractive opportunity for finance-savvy individuals interested in investing in this emerging sector.
