Shares of Nvidia (NVDA) have gone on an impressive run over the past thirty days, rising close to 15%, compared with the 1% rise in the S&P 500 index. On a year-to-date basis the performance looks even better. The graphics chip giant has skyrocketed 116%, while the S&P 500 index has rising 9.34%. How much higher can their shares go?
The semiconductor specialist will report first quarter fiscal 2024 earnings results after Wednesday’s closing bell. Essentially, since bottoming in mid-October last year NVDA stock has exploded. It’s no coincidence that Nvidia’s popularity spiked around the same time the market began pivoting towards generative AI models such as ChatGPT, which Microsoft (MSFT) has made a significant investment in via its partnership with OpenAI.
The momentum created by ChatGPT forced investors to recognize the importance of Nvidia’s GPU data center accelerators which can potentially serve as the backbone for Microsoft’s AI infrastructure. Nvidia CEO Jensen Huang has declared that generative AI represents an “iPhone moment.” Bank of America analyst Vivek Arya sees an opportunity for Nvidia, referring to Nvidia's "full stack" of accelerated silicon, systems, software and developers which puts the company in a position to "lead the nascent generative AI arms race among global cloud and enterprise customers.”
Unveiled in 2022, Nvidia’s accelerators such as the H100 means it has already developed generative AI accelerators to seize market share before the market is even identified. But with the forward P/E now close to 65, is it time to take profits? To continue to the stock's upward trend the company on Wednesday must talk positively about its growth prospects for the next quarter and beyond.
For the three months that ended April, Wall Street expects the Santa Clara, Calif.-based company to earn 92 cents per share on revenue of $6.52 billion. This compares to the year-ago quarter when earnings came to $1.36 per share on revenue of $8.29 billion. For the full year, ending in December, earnings of $4.58 per share would rise 37% year over year, while full-year revenue of $30.27 billion would rise 12.2% year over year.
Until recently, the bearishness in the stock was driven by the company’s deceleration in earnings and revenue, which suggests a meaningful deterioration of business fundamentals, particularly in the graphics unit. Likewise, weak gross margins due to declining prices had also taken down Nvidia’s earnings growth estimates significantly. The company and the entire sector dealt with rising interest rates which has pressured average selling prices of its chips.
Fast forward six months later, the narrative has changed. Not only has the company corrected inventory levels, while preparing for new product launches, management has also touted its datacenter business, which has shown strong revenue improvement over the past two quarters, driven by increased demand of Nvidia's computing platforms that support data analysis.
The datacenter segment, which includes Nvidia’s AI operations is expected to produce revenue of close to $4 billion, highlighting a strong increase from the year-ago quarter. In the fourth quarter, the beat was driven by a recovery in the gaming segment with the company delivering adjusted EPS of 88 cents on revenue of $6.05 billion. Of that total, gaming revenue of $1.83 billion was up 16% sequentially. Just as impressive, Q4 datacenter revenue rose 11% year over year to $3.62 billion.
Thanks to the growing adoption of cloud-based solutions and the growing hybrid work, Nvidia continues to enjoy some tailwinds in its Datacenter business which may boost its Q2 outlook. As such, the guidance the company provides on Wednesday for both the gaming and datacenter segments will be the key factors in the stock’s near-term direction.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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