Nvidia’s stock price could rise further after it reports second-quarter earnings.
NVIDIA (NVDA -1.78%) Its transformation from gaming industry specialist to artificial intelligence (AI) powerhouse has been nothing short of astounding: accounting for roughly 70% to 95% of the chips used to train and infer large-scale language models (according to Mizuho Securities), Nvidia has emerged as the biggest beneficiary and driver of the ongoing AI revolution.
While NVIDIA shares are up about 140% over the past year and an astounding 471% over the past three, it’s unlikely that the multi-year tailwinds that have been driving NVIDIA’s stock price will run out in a few quarters. The company’s stock still has room to grow, especially since its stock split has made it more accessible to shareholders.
NVIDIA has beat consensus revenue estimates in 11 of the past 12 quarters and profit estimates in 10 of the past 12 quarters. While there’s no guarantee the company will continue to wow the market, investors waiting for the company’s next earnings release (due August 28) can be confident that the company is taking advantage of a great opportunity. I believe NVIDIA stock is still worth buying for the following reasons:
Advantages in the AI data center market
Nvidia’s data center products, including graphics processing units (GPUs), AI software stacks, supporting frameworks and other systems, are in high demand for AI and high-performance computing applications. Enterprises across industries, including cloud service providers, consumer internet companies, finance, healthcare and automotive, are widely using the company’s solutions to build their AI infrastructure.
The company’s data center business then saw explosive growth in the first quarter of fiscal 2025 (ended April 28), with revenues rising 427% year over year to $22.6 billion. Moreover, with demand for the company’s next-generation H200 and Blackwell architecture chips far outstripping supply, Nvidia expects the momentum in its data center business to continue in the coming quarters.
Technology Leadership
Nvidia’s rapid technological innovation is making it difficult for competitors to gain market share. The company has already released a new GPU architecture called Blackwell, which is four times faster at training and 30 times faster at inferring large language models than the company’s flagship H100 GPU. The Blackwell architecture is designed to be backward-compatible with the software stack, allowing customers to easily migrate to advanced chips. The company also announced plans to release a successor to the H100 GPU every year, a major shift from its previous strategy of releasing a major chip every two years.
Nvidia has also built a robust software stack to support its AI GPU infrastructure and has extensive partnerships with multiple cloud service providers. Its recently released Nvidia Inference Microservices (NIM) software also helps developers rapidly build and deploy AI applications. Such deployments have forced clients who want to move to competing hardware to face high switching costs. Nvidia’s commitment to innovation has encouraged clients to choose to upgrade and expand their AI infrastructure.
Expanding the overall target market
Nvidia has positioned itself as a full-stack AI platform provider, capturing a larger slice of global AI infrastructure spending. In addition to advanced AI GPUs, the company also provides all other critical infrastructure its clients need for AI production, including central processing units, data processing units, advanced networking solutions (InfiniBand, Ethernet, Spectrum-X), software ecosystem (CUDA platform, Nvidia Inference Microservices), and servers.
Nvidia is also focusing on new data center revenue streams from the national AI market. As governments around the world seek to develop their own national AI capabilities, Nvidia is partnering with companies in those countries and regions as a leading AI infrastructure provider. The company said in its last earnings call that it expects national AI revenue to be “high single-digit billions” in the fiscal year ending Jan. 31, 2025.
Nvidia expects automotive to become the largest enterprise vertical for its data center business, generating billions of dollars in revenue this year. The company is already helping Tesla train an AI cluster of 35,000 H100 GPUs for self-driving cars, and it has won multiple design orders from several major electric vehicle manufacturers for its Nvidia Drive Thor AI car platform.
Increase profitability
Despite continued investments in technology innovation, Nvidia expanded its margins. The company’s non-GAAP (adjusted) gross margins rose 12.1 percentage points year over year to 78.9% in the first quarter. Net income also rose 462% year over year to $15.24 billion, highlighting the company’s strong pricing power and ability to grow revenue faster than expenses.
Shareholder returns and valuation
Nvidia returned $7.8 billion to shareholders through share repurchases and cash dividends in the first quarter. The company announced a 10-for-1 stock split, effective June 10, and a 150% increase in its quarterly dividend after the split. These moves underscore Nvidia’s confidence in its future growth prospects and its commitment to returning value to shareholders.
At its recent stock price, NVIDIA is trading at just under 35 times trailing-12-month sales, significantly higher than its five-year average of about 26. But while the stock is expensive, the valuation seems justified given the company’s robust growth forecast. Analysts expect NVIDIA’s revenue to grow 97.5% year over year to $120.3 billion and earnings per share (EPS) to soar 111.4% year over year to $2.74 in fiscal 2025.
Against this backdrop, investors should consider buying at least a small amount of shares in this stock ahead of the release of second-quarter earnings.
