What to Expect from Nvidia’s Earnings: Is It Worth Investing Now?

The excitement around artificial intelligence (AI) reached new heights when ChatGPT, a generative AI application, was launched in late 2022. This excitement benefited several companies, with Nvidia (NASDAQ: NVDA) standing out as a prime example.

Nvidia, known for its powerful graphics processing units (GPUs), saw its stock become the best performer in the S&P 500 last year, largely thanks to the AI boom. Since the start of 2023, Nvidia’s shares have skyrocketed by 510%, signaling strong investor confidence. However, with the company’s first-quarter earnings report due on May 22, investors are at a crossroads, wondering if the stock can maintain its upward trajectory.

Nvidia’s Performance and Upcoming Earnings

Nvidia is set to release its first-quarter financial results after the market closes on Wednesday, May 22. The anticipation is high, especially considering that the stock surged 16% following an excellent fourth-quarter report last year. Shareholders are eager for a repeat performance, but this time, analysts have set the bar even higher, which raises the question: Is now a good time to buy Nvidia stock?

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In the fourth quarter of 2023, Nvidia exceeded all expectations, with revenues soaring to $22.1 billion, a 265% increase. This spike was driven by robust demand for its data center products, which are increasingly being used to power AI systems and software. Nvidia’s adjusted net income also saw a dramatic rise, up 491% to $12.8 billion.

CEO Jensen Huang attributed these strong results to a significant shift in how data centers operate. They are moving away from general-purpose computing towards specialized accelerated computing, transforming into what Huang calls "generative AI factories" that convert vast data into usable intelligence. Nvidia’s AI supercomputers are at the heart of this transformation, playing a crucial role in this new industrial revolution.

Expectations for the First Quarter, 2024

For the first quarter of 2023, Nvidia has forecasted a 234% increase in revenue, reaching $24 billion. The company has also provided optimistic projections for its margins and earnings, expecting an approximate 416% increase in adjusted net income to $5.62 per diluted share. Meanwhile, analysts predict a slightly higher revenue of $24.5 billion and an adjusted net income increase of 409% to $5.55 per diluted share. Such forecasts suggest another strong quarter for Nvidia, but the stakes are high, and any shortfall could impact the stock price negatively.

Nvidia’s strategic advantage in the AI market is significant. It controls between 80% and 95% of the market share in AI chips, making its GPUs virtually indispensable for complex data center operations. Moreover, Nvidia is not just a hardware company. It recently introduced its first data center CPU, which is on track to become a multibillion-dollar product line.

Additionally, its high-performance networking equipment has grown into a $10 billion business, and its software and services offerings are also expanding, with revenues hitting a $1 billion annual run rate in the last quarter.

Such diversification not only strengthens Nvidia’s position in the AI industry but also highlights its ability to innovate and adapt to market needs. As noted by Goldman Sachs analysts,

“Nvidia is likely to remain the industry standard for the foreseeable future due to its comprehensive capabilities across both hardware and software.”

Considering Nvidia’s Stock Valuation

Despite the promising outlook, Nvidia’s stock valuation is high, trading at 74 times earnings. This valuation reflects the optimistic growth projections for the AI sector and Nvidia’s earnings. The graphic processor market, essential to AI development, is expected to grow by 28% annually through 2030, while overall AI spending is forecasted to increase at a 37% annual rate.

Conclusion

Investing in Nvidia now carries certain risks due to its lofty valuation and high market expectations. However, for those who believe in the long-term growth of AI and Nvidia’s role in it, even a small position could be worth considering. As the AI landscape continues to evolve, Nvidia’s ongoing innovation and market dominance will likely be key drivers of its future success.