NVIDIA's Q3 Earnings: A Deep Dive into Long-Term Investment Potential

Oct.20, 2024, 06:17PM PT, by: StockHawk (origin link)

As a prominent player in the AI, cryptocurrency mining, and gaming sectors, NVIDIA's upcoming Q3 earnings report has garnered significant investor attention. With the anticipated release date falling between November 14th and 21st, market participants are keen to assess the company's financial performance and future prospects. This blog will explore whether NVIDIA represents a sound long-term investment and delve into potential implications of the upcoming earnings announcement.

Note: The following analysis is based on historical data and industry trends, and does not constitute financial advice.

Q2 summary

Despite Wall Street's anticipation for a resurgence in AI investments among the Magnificent 7 during the second quarter, several tech giants, including Microsoft, Google, and Amazon, fell short of expectations. However, NVIDIA bucked this trend with a strong earnings report.

The company's Q2 revenue reached $30.0 billion, a 15% increase from the previous quarter and a substantial 122% year-over-year growth. Notably, Data Center revenue surged to $26.3 billion, representing a 16% quarter-over-quarter increase and a remarkable 154% year-over-year growth.

Following the earnings announcement, NVIDIA's stock experienced a temporary dip, potentially influenced by factors such as the anticipated delay of the Blackwell GPU and broader market sell-offs. However, the stock has since rebounded, currently trading around $138.

Q3 expectations

According to TipRanks, investor sentiment towards NVIDIA remains overwhelmingly positive, with a strong majority of analysts maintaining buy ratings. In September, 5 analysts rated the stock as a "strong buy," while 76 analysts issued "buy" recommendations. Although the number of "hold" ratings decreased slightly during the last quarter, the overall outlook for NVDA remains bullish. I also noticed that there are 30 analysts who moved on and stopped their rating to Nvidia stock.

As Q3 earnings approach, analysts are anticipating NVIDIA to report earnings per share of $0.74, with a range of estimates ranging from $0.71 to $0.82. Additionally, analysts are projecting sales to reach $32.95 billion, falling within a range of $31.85 billion to $34.98 billion. It's noteworthy that NVIDIA's official guidance for Q3 is slightly lower at $32.5 billion.

From tipranks.com

 

Short-term play

NVIDIA has cemented its dominance in the AI training chip market, commanding over 80% of the market share. This strong competitive advantage is likely to drive continued sales growth in the data center segment. However, the market's high expectations for NVIDIA are largely reflected in its current stock price.

While the company's future prospects appear promising, investors should be prepared for short-term volatility. Due to the significant market anticipation surrounding NVIDIA's earnings reports, the stock price can experience sharp fluctuations of 20-30%.

For those seeking to capitalize on these price movements, options trading may present opportunities. However, it's essential to acknowledge the inherent risks associated with this strategy.

Long-term

When assessing NVIDIA as a long-term investment, several key factors should be carefully evaluated:

Competitive Landscape: NVIDIA's dominance in the market is challenged by AMD and Intel, particularly in the gaming GPU segment. While in the data center segment, companies are coming up with their custom chips to compete, such as AWS Trainium and AWS Inferentia chips from the acquired Annapurna lab, Azure Maia chip from microsoft. The company's ability to sustain its market share and technological leadership will be instrumental to its long-term success.

Regulatory Environment: The tech industry is increasingly subject to regulatory oversight. NVIDIA may face challenges related to antitrust concerns or data privacy regulations, especially amid escalating geopolitical tensions.

Economic Factors: The broader economic climate and the evolving dynamics of the generative AI market present significant considerations for NVIDIA's long-term prospects. While there is substantial investment in AI models and applications, the profitability of these ventures remains a question. Many companies, including tech giants like Microsoft and Meta, anticipate a lengthy return on their AI investments.

Given these factors, it is reasonable to expect a potential slowdown in the growth rate of NVIDIA's data center sales. As competition intensifies from companies like AMD and Amazon, and custom AI chips become more prevalent, the demand surge for NVIDIA's products may stabilize or even decelerate beyond 2025.

Price Target and Conclusion

Accurately forecasting short-term stock prices is inherently challenging due to numerous factors. Based on our analysis of NVIDIA's business conditions, let's consider a potential valuation range.

Assuming a net operating income of $65 billion and applying a multiple of 30 for mature businesses and 50 for high-growth companies, we can estimate a fair valuation between $2 trillion and $3.5 trillion. However, it's important to note that this is a long-term projection.

While some may argue for a more aggressive growth trajectory, with annual income reaching $100 billion or $200 billion, current AI profit data from major tech companies does not fully support such a scenario. Therefore, I anticipate NVIDIA's stock price to remain within a range of $80 to $140 over the next five years.