Nvidia (NVDA) is set to report its second quarter earnings at the end of August. In this article, I explain why I am bullish on the stock ahead of the earnings release. The AI darling has seen its shares fall recently due to overly high expectations for AI companies amid macroeconomic headwinds. However, this season of earnings reports from major tech companies has confirmed that demand for Nvidia’s GPUs remains robust and the company’s market dominance is likely intact. Thus, Nvidia is in a position to likely beat its previous guidance and issue strong forecasts for the second half of the year.
Wall Street’s confidence in NVIDIA remains strong
Given this, Wall Street’s confidence in Nvidia remains strong. Nvidia’s bullish outlook looks solid heading into the company’s earnings release. The market is expecting Nvidia to release its second-quarter earnings on August 28. Analysts expect EPS to rise to $0.64 from $0.61 last quarter. If Nvidia beats these expectations, it will mark its seventh consecutive quarter of beating expectations.
Additionally, on the revenue side, Nvidia is expected to report $28.6 billion, up from $26 billion last quarter. This figure is $600 million above Nvidia’s interim guidance for the second quarter. Additionally, Nvidia expects gross margins to be between 74.8% and 75.5%.
Despite these optimistic projections, consensus estimates for Q2 show impressive growth of 137% YoY EPS and 111% YoY revenue. This impressive growth highlights strong market confidence, with 38 of 40 analysts raising their EPS estimates and 37 of 39 raising their revenue estimates. As a result, the overall consensus on Nvidia remains very bullish among Wall Street analysts. NVDA has an average target price of $144.17 for a Strong Buy, suggesting a potential upside of 33.89% from the stock’s recent price.
Why Nvidia’s second quarter will be strong again
Considering these factors, Wall Street remains bullish while also expecting strong second-quarter results for Nvidia based on recent trends and earnings reports.
First, Nvidia continues to dominate the GPU market, while AI investments remain strong. Nvidia’s closest competitor, Advanced Micro Devices (AMD), recently reported its June quarter results. While AMD has made great strides in data center and GPUs, it has not shown that it will take significant market share from Nvidia by 2025. This is a concern for Nvidia investors, but recent data shows that Nvidia has been holding steady, maintaining its GPU market share of around 88% last quarter. Additionally, Taiwan Semiconductor Manufacturing Co. (TSM), which produces most of the chips in the world, including Nvidia’s data center GPUs, reported that its revenue in July was up 33% year-over-year and 10% month-over-month. This bullish view on the AI sector indicates that TSMC is receiving more orders, suggesting that Nvidia is also increasing its chip purchases.
Additionally, large technology companies are also signaling robust growth in AI. For example, Tesla (TSLA) said in a recent conference call that it is pursuing all aspects of its AI robotics stack, implying significant investments in AI and data centers, heavily supported by Nvidia GPUs. Additionally, Nvidia’s GPUs, including the H100 with its hopper architecture, are essential for training large language models (LLMs). These GPUs continue to attract interest from large technology companies. For example, Meta Platforms’ (META) Llama 3 is gaining momentum, and OpenAI’s GPT-4 model is being trained using Nvidia GPUs such as the A100.
All things considered, strong performances from Nvidia’s competitors, encouraging data from TSMC, and increased adoption of Nvidia’s GPUs by major tech companies suggest a strong second quarter for Nvidia.
What undermines NVDA’s bullish outlook?
But despite the positive news surrounding Nvidia’s second quarter, there are some concerns that could impact the stock price.
Specifically, one of the main focuses this quarter will be AI-driven demand, especially Nvidia’s data center segment. Investors will be closely scrutinizing demand for GPUs such as the A100 and H100. If Nvidia shows high margins on AI-related products, it will be a sign of strong demand and pricing power, which will be bullish. Conversely, if it fails to achieve this, it could spell trouble.
Additionally, guidance for upcoming quarters will also be a big focus, as this has been a weak spot for some of the AI giants during earnings season, so any positive commentary about sustained or increasing demand for AI and data center products will be important.
For bears, any declines in these areas could further increase negative sentiment. Nvidia’s stock has risen significantly in recent years, which may make investors wary, especially given its current forward P/E ratio of 38.5x. This high valuation is based in large part on sky-high EPS growth of 110% for the period ending January 2025. Thus, failure to meet these lofty expectations could lead to bearish pressure.
Why NVDA is the smart choice now
Despite these concerns, the bullish thesis on NVIDIA is facing a severe test: The company’s stock price has recently experienced a dramatic decline, wiping out $1 trillion in market cap — the value of Tesla — in five weeks. This decline from a high of over $135 per share in June reflects market sentiment more than NVIDIA’s fundamentals, calling into question the company’s current standing.
Still, some investors believe Nvidia is still in a rapid growth phase, justifying its high valuation and supporting the potential for higher shares. But with its stock having soared 2,500% over the past five years, concerns of a bubble remain if the company’s quarterly results disappoint.
In situations like this, focusing on the longer-term moving averages in particular can help gauge momentum. Nvidia stock has shown high volatility of 49% per year, so it’s especially important to monitor the moving averages. If the stock is above the 200-day moving average, it could be a signal to sell. If it is below, it could indicate a buying opportunity. Currently, the 200-day moving average is $81.42 and the stock is below $105, which suggests a potential buying opportunity.
Key Takeaways
In conclusion, Nvidia’s commanding market position, robust demand for its AI-powered GPUs, and unwavering confidence from Wall Street analysts all point to a strong second quarter. While cautious guidance may result in short-term volatility, Nvidia’s long-term outlook remains very promising, making it an attractive investment opportunity at this stage. If Nvidia maintains its growth projections over the next few years, we believe the current valuation will be de-risked.
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