Shares of Nvidia (NVDA) have gone on an impressive run over the past six months, surging some 96%, compared with the 7% rise in the S&P 500 index. On a year-to-date basis the performance looks even better. The graphics chip giant has skyrocketed 187%, while the S&P 500 index has risen 13%. Essentially, since bottoming in mid-October last year, NVDA stock has exploded.
How much higher can Nvidia go? The graphics chip powerhouse will report second quarter fiscal 2024 earnings results after Wednesday’s closing bell. While the forward P/E of 50 might appear expensive relative to the S&P 500 index, NVDA has, in fact, lowered the forward P/E by more than 15 points since the first quarter. This is because, as the stock has risen, the company has also raised its profit forecast.
For investors who are thinking of taking profits, several analysts are projecting NVDA stock to go even higher, including Citigroup analyst Atif Malik, who maintained his Buy rating and $520 price target on Nvidia. From current levels of $417, Malik is expecting addition premiums of 25%. Citing strong artificial intelligence demand, Malik noted that Nvidia’s Q2 datacenter revenue could rise 90% year-over-year which is three percentage point higher than consensus estimates. He also expects datacenter revenue to rise 12% sequentially.
Nvidia’s expected growth for its GPU datacenter accelerators has spiked amid generative AI models such as ChatGPT which Microsoft (MSFT) has made a significant investment in via its partnership with OpenAI. Unveiled in 2022, Nvidia’s generative AI accelerators have already seized market share from competitors who are only in the development stage. But to continue to the stock’s upward trend the company on Wednesday must continue to tout its growth prospects for the next quarter and beyond.
For the three months that ended July, Wall Street expects the Santa Clara, Calif.-based company to earn $2.07 per share on revenue of $11.17 billion. This compares to the year-ago quarter when earnings came to 51 cents per share on revenue of $6.7 billion. For the full year, ending in December, earnings of $8.08 per share would rise 142% year-over-year, while full-year revenue of $44.03 billion would rise 63% year-over-year.
The momentum created by ChatGPT forced investors to recognize the importance of Nvidia’s accelerators such as the H100 which positions the company ahead in the AI arms race for global cloud and enterprise customers. In terms of execution, not only has the company corrected prior inventory struggles, but the company also last quarter blew the market away with its top and bottom beat, while crushing its guidance for the just-ended quarter.
The company reported Q1 adjusted EPS of $1.09 on revenue of $7.19 billion, beating consensus estimates of 92 cents on revenue of $6.52 billion. During the quarter, Nvidia’s datacenter revenue rose 14% year-over-year, reaching a record high of $4.28 billion. Aside from growing demand for generative AI, the revenue growth was driven by large language models utilizing Nvidia’s GPUs. In terms of profits, Nvidia’s adjusted gross margin came in at 66.8%, up 70 basis points sequentially.
As impressive as these numbers were, it was the company’s guidance and its assured leading position as an AI chip supplier that got investors excited, guiding for Q2 revenue of $11 billion, crushing estimates for revenue of $8.5 billion. The result was enough to send the stock within reach of a trillion-dollar valuation.
With the growing adoption of cloud-based solutions and growing demand for generative AI, Nvidia continues to enjoy tailwinds. Combined with rising margins and quarterly free cash flow, it would be a mistake to part with the stock ahead of earnings.
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