This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Nvidia (NASDAQ: NVDA) will announce its second-quarter results after the closing bell rings on Wednesday, August 28, 2024. The semiconductor company topped consensus estimates with its last four reports, so Wall Street analysts may have inflated expectations. But there is another reason the stakes are particularly high this time around.
Nvidia shares have advanced 126% year to date, making it the second-best performing stock in the S&P 500 behind Super Micro Computer. Investors are clearly excited about artificial intelligence (AI), perhaps too excited. Valuations are creeping higher and some experts think the "AI bubble" will burst in the not-too-distant future, at least temporarily.
In short, Nvidia shares could decline sharply following its second-quarter report on Aug. 28, either because the company misses estimates or because the market is nervous about the durability of AI spending. Is it safe to buy the stock right now?
The short-term outlook for Nvidia is clouded by high expectations and other concerns
Nvidia topped Wall Street's consensus revenue and earnings forecasts in each of the last four quarters. But the company beat estimates by increasingly small margins with each subsequent report. If that trend persists, Nvidia could miss expectations when it announces financial results for the second quarter of fiscal 2025 on Aug. 28.
The chart below shows how Wall Street's consensus revenue and non-GAAP earnings per share (EPS) forecasts compare to Nvidia's actual results last year.
| FINANCIAL METRIC | Q2 2024 (ACTUAL) | Q2 2025 (ESTIMATE) | CHANGE |
|---|---|---|---|
| Revenue | $13.5 billion | $28.5 billion | 111% |
| Non-GAAP EPS | $0.27 | $0.64 | 137% |
Even if Nvidia beats estimates, the stock could still decline following the report if the market is disappointed with guidance. Businesses are currently spending heavily on artificial intelligence (AI) infrastructure, but spending could slow if return on investment (ROI) metrics fail to impress. Bank of America analysts recently wrote, "End-user companies and their investors will soon look for revenue to justify the [money] already spent."
However, Nvidia CFO Colette Kress plans to share ROI metrics on the upcoming earnings. That implies the company is not only aware that investors are concerned about the sustainability of AI spending, but also that it has encouraging data that could allay those concerns. It seems unlikely that Nvidia would tout ROI data under other circumstances.
Analysts at Goldman Sachs have a similar outlook. In a recent note, they expressed confidence the AI spending cycle is sustainable and that Nvidia will hold its "leadership position through consistent and rapid innovation across compute, networking, and software." The analysts also think Nvidia will beat consensus estimates when it announces second-quarter results.
That brings me to a third problem. Even if Nvidia beats estimates and provides convincing data about the sustainability of AI spending, the stock may still decline simply because investors take profits. Remember, Nvidia beat estimates in each of the last four quarters, but the stock did not always move higher on the news. Listed below is the price action on the trading day following the last four earnings reports.
- Q2 2024: The stock increased 0.1% on August 23, 2023.
- Q3 2024: The stock declined 2.5% on November 22, 2023.
- Q4 2024: The stock increased 16.4% on February 22, 2024.
- Q1 2025: The stock increased 9.3% on May 23, 2024.
Regarding the upcoming report, pricing data from the options market implies post-earnings share price volatility of 11%. In other words, options investors believe Nvidia stock could rise or fall by as much as 11% on Aug. 29. That figure is subject to change with each trading day between now and then.
The long-term outlook for Nvidia remains upbeat due to its durable competitive advantage in AI chips
Investors interested in owning Nvidia stock should ignore the potential volatility surrounding its second-quarter report. Instead, they should focus on the long-term investment thesis and the current valuation.
Nvidia is the market leader in graphics processing units (GPUs), semiconductors that have become the industry standard in speeding up compute-intensive data center workloads like analytics and machine learning. As a result, Nvidia also dominates the market for AI accelerators. "Nvidia's chips underpin all of the most advanced AI systems, giving the company a market share estimated at more than 80%," according to The Wall Street Journal.
Moreover, Nvidia is well positioned to maintain its leadership because there are no good alternatives to its CUDA platform, an ecosystem of software libraries and developer services that streamline data preparation, model training, and AI application development. Ben Colello at Morningstar recently wrote, "We believe Nvidia not only has a hardware lead, but benefits from high customer switching costs around CUDA, making it unlikely for another GPU vendor to emerge as a leader in AI training."
With that in mind, Wall Street expects Nvidia to grow adjusted EPS at 51% annually through fiscal 2026 (ends January 2026). That consensus estimate makes the current valuation of 62 times adjusted earnings look relatively reasonable. I say that because it gives Nvidia a PEG ratio of 1.2.
For context, using the same methodology, Microsoft currently carries a PEG ratio of 3, Arm Holdings has a PEG ratio of 4.1, and Palantir Technologies has a PEG ratio of 4.3. So the market is affording other AI companies higher valuation multiples. That does not mean Nvidia is cheap, but it does indicate that its current valuation is not an absurd deviation from other AI stocks.
Here's the bottom line: Investors looking for guaranteed short-term gains should avoid Nvidia stock. The near-term outlook is clouded by high expectations and uncertainty regarding the sustainability of AI spending. But investors focused on long-term gains should consider buying a small position. If Nvidia shares slip after the second-quarter report, they can treat it as a buying opportunity and build a slightly larger position (within their comfort zones).
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
