Everybody on Wall Street has a bullish opinion about Nvidia’s (NVDA) -) fiscal second quarter stunner, but few were likely savvy enough to buy its shares earlier this year, before its surprising AI-fueled rally.
Real Money’s Stephen Guilfoyle is among the few Wall Street veterans who regularly shares opinions on stocks he owns. Recently, he weighed in on Nvidia to explain what could happen next for the stock following its blockbuster results.
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Nvidia rides a tidal wave of AI demand
The successful launch of OpenAI’s ChatGPT last December opened everyone’s eyes to the potential associated with artificial intelligence. Microsoft quickly added ChatGPT to Bing to improve search results, and Alphabet responded by launching its generative AI, Bard, to protect Google’s search market share.
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The flurry of activity isn’t limited to search engines, though. Every industry is touting the potential benefits of incorporating AI into their operations. Finance companies are exploring the use of AI in managing money, trucking companies are considering how it may better improve logistics, and healthcare companies are exploring how it may speed drug development.
The potential associated with AI has sparked significant research and development that’s driven a reshuffling of IT budgets to bolster networks to handle heavy and energy-intensive workloads.
This push to build out IT infrastructure is a boon to Nvidia. Its H100 graphics chip is better suited to handle training and operating AI models than the CPUs currently dominating networks operated by cloud service providers Amazon (AMZN) -), Microsoft (MSFT) -), Alphabet (GOOGL) -), and Oracle (ORCL) -).
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As a result, Nvidia’s fiscal second-quarter financials handily outpaced already optimistic forecasts. Revenue surged 101% to $13.5 billion, nicely above $11.2 billion estimates. In turn, earnings per share skyrocketed 429% to $2.70.
Notably, the company’s third-quarter outlook suggests that the IT spending trend will remain a tailwind, further strengthening its balance sheet.
“Nvidia is at it again. It is guiding revenue to $16 billion, plus or minus 2%. The street was looking for something close to $12.8 billion. Nvidia sees gross margin at 71.5% GAAP or 72.5% adjusted, give or take 50 basis points,” said Guilfoyle. “Nvidia ended the period with a cash position of $16.023 billion (+20.5% over six months) and inventories of $4.319 billion (-16.3% over six months). This puts current assets at $28.797 billion. Current liabilities add up to $10.334 billion, including $1.249 billion in short-term debt. Nvidia's current ratio stands at a robust 2.79, and a quick ratio (sans inventories) of 2.37, which is beast-like.”
Nvidia’s stock fizzles, but upside remains
After Nvidia reported its market-trouncing second quarter results, shares initially gapped higher above $500 in the post-market on Aug. 23. Unfortunately, for longs, shares finished essentially flat on Aug. 24.
The relatively lackluster response to Nvidia’s earnings is likely because expectations were so high that speculators bought shares ahead of earnings, hoping to make a quick buck. Once the report was released, those with quick trigger fingers hit the sell button in search of the next idea.
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Guilfoyle says Nvidia shares could be poised for additional upside when the dust settles. He writes:
“The business is not as good as gold, but far better. Cash flows are growing at a pace that is just astonishing. Costs and expenses are under control. The balance sheet is beautiful. While the growth in the data center business is beyond anything I would have thought possible not too long ago, gaming appears to be back on track as well.”
Guilfoyle’s target price for Nvidia’s stock is $576, roughly 22% higher than its Aug. 24 closing price. But that might not be where it stops climbing. He thinks if everything goes Nvidia’s way, shares could have a shot at $600.
