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As Nvidia (NVDA) gears up for its upcoming earnings release, investors find themselves at a crossroads, weighing various factors that could influence the stock’s trajectory. Recently, NVDA has been in the spotlight due to escalating tensions between Taiwan and China, contributing to a broader pullback from its highs as part of a wider rotation out of Big Tech. Additionally, Nvidia is reportedly developing a China-specific chip, potentially mitigating some regulatory impacts and opening doors to sustained engagement with the Chinese market.
While Nvidia’s technological prowess and dominant market position in GPUs for gaming and AI make it a standout, the company’s stock has not been immune to the volatile shifts affecting the tech sector. Analyst sentiment remains predominantly bullish, underscoring Nvidia’s strong fundamentals and leading role in AI advancements. However, some caution is advisable, as Raymond James recently highlighted concerns about Nvidia’s chart setup, suggesting potential technical headwinds that could affect short-term price movements.
With Nvidia's quarterly earnings slated for August, the stakes are high. In this article, we will delve into Nvidia’s recent developments, financials, valuation, growth prospects, and sentiment in the options market, evaluating whether the stock is a prudent buy in the lead-up to its next earnings release.
About Nvidia Stock
Based in Santa Clara, California, NVIDIA Corporation (NVDA) is a premier technology firm known for its expertise in graphics processing units (GPUs) and artificial intelligence (AI) solutions. The company is renowned for its pioneering contributions to gaming, data centers, and AI-driven applications. Its market cap currently stands at $2.87 trillion.
While the stock is now down about 17% from its June intraday peak of over $140, shares of Nvidia have still skyrocketed roughly 142% on a year-to-date basis, significantly outperforming the broader market.
Recent Launches from Nvidia
On July 29, Nvidia unveiled significant enhancements to Universal Scene Description, or OpenUSD, aimed at broadening its use in robotics, industrial design, and engineering. These advancements will speed up developers' capacity to create highly precise virtual worlds, paving the way for the next evolution of AI.
On July 23, Nvidia launched its new NVIDIA AI Foundry service and NVIDIA NIM inference microservices, designed to enhance generative AI for global enterprises using the openly available Llama 3.1 model collection. NVIDIA AI Foundry enables enterprises and nations to develop custom “supermodels” tailored to their specific industry use cases, utilizing Llama 3.1 alongside NVIDIA's software, computing, and expertise. Enterprises can train these supermodels using both proprietary data and synthetic data generated from Llama 3.1 405B and the NVIDIA Nemotron Reward model.
In June, Hewlett Packard Enterprise (HPE) and Nvidia introduced NVIDIA AI Computing by HPE, a jointly developed portfolio of AI solutions and go-to-market integrations, designed to help enterprises accelerate the adoption of generative AI. A standout feature of the portfolio is HPE Private Cloud AI, a pioneering solution that offers the most comprehensive integration yet of NVIDIA AI computing, networking, and software with HPE’s AI storage, computing capabilities, and the HPE GreenLake cloud.
Also in June, Nvidia introduced NVIDIA Omniverse Cloud Sensor RTX, a suite of microservices designed to facilitate physically accurate sensor simulation, accelerating the development of fully autonomous machines across various applications.
Nvidia Works on a Flagship AI Chip for Chinese Market
In March, the AI chip giant unveiled its “Blackwell” chip series, which is scheduled for mass production later in the year. The new processors feature two silicon squares, each the size of the company's previous models. Within the series, the B200 processor performs certain tasks, such as delivering responses from chatbots, up to 30 times faster than its predecessor.
On July 22, Reuters reported that Nvidia is developing a version of its new flagship AI chips for the China market, designed to comply with current U.S. export controls.
Nvidia plans to collaborate with Inspur, one of its major distribution partners in China, on the launch and distribution of the chip, tentatively named the “B20,” according to two sources who spoke to Reuters. A separate source informed Reuters that shipments of the “B20” are scheduled to begin in the second quarter of 2025.
Notably, China has long been a significant market for Nvidia, contributing about 17% of its revenue as of January this year - down from 26% two years prior, due to U.S. sanctions. In light of this, the introduction of the “B20” chip is an effort to regain market share and strengthen Nvidia’s position in China.
Analysts Are Bullish Ahead of Nvidia’s Q2 Results
On July 31, Morgan Stanley named Nvidia a top U.S. chip stock pick, and said recent weakness in the stock provides a “good entry point.” The firm kept an "Overweight' rating on the stock with a $144 price target.
Prior to that, Piper Sandler analyst Harsh Kumar on July 22 raised his price target on Nvidia stock to $140 from $120, and reiterated an “Overweight” rating. The analyst stated that, despite recent volatility, the bull case for Nvidia stock remains intact: “We view the setup for Nvidia positively ahead of the July-quarter earnings and the October-quarter guidance," Kumar said in a client note. “We see the strong business trends exhibited over the prior year by Nvidia set to continue, aided by the official launch of the Blackwell architecture in the October quarter.”
Separately, Loop Capital analyst Ananda Baruah raised his price target on NVDA stock to $175 from $120 and kept a “Buy” rating.
Additionally, as noted by On the Pulse investor on July 21, “Nvidia’s valuation is actually not excessive at all.” Despite recognizing the rapid growth, the investor remains optimistic about NVDA’s future prospects, particularly in its data center business. The investor argues that the company’s status as the undisputed leader in the AI processor market positions it for continued gains well into the future, believing that “Nvidia’s AI growth curve is just getting started.” As a result, On the Pulse confidently rates Nvidia shares as a “Buy.”
However, Raymond James analyst Javed Mirza said in a note on July 26 that Nvidia’s stock could continue to decline in the short term, potentially dropping another 16% to $94.94 per share. Mirza pointed out that Nvidia has “triggered a mechanical sell signal” according to a moving average convergence/divergence (MACD) indicator that monitors price momentum. He also emphasized that Nvidia’s price is falling below its 50-day moving average and showing initial signs of selling pressure, indicating a potential intermediate-term correction phase lasting about 1-3 months.
How Did Nvidia Perform in Q1?
On May 22, Nvidia reported quarterly results and guidance that topped Wall Street’s expectations, propelling its shares to a gain of over 9% in the subsequent trading session.
The company reported record revenue of $26.0 billion in the first quarter, an 18% increase from the previous quarter and a 262% increase year-over-year, significantly exceeding its own outlook of $24 billion and Wall Street's consensus of $24.59 billion. Data Center revenue, which represented approximately 87% of total revenue, reached a record $22.6 billion, marking a 23% sequential increase and a 427% year-over-year growth. This figure exceeded estimates of $21.13 billion, driven by sustained strong demand for the NVIDIA Hopper GPU computing platform.
Gaming revenue increased by 18% year-over-year to $2.6 billion, aligning with estimates. Automotive revenue for the period totaled $329 million, and professional visualization revenue rose 45% year-over-year to $427 million.
“Our data center growth was fueled by strong and accelerating demand for generative AI training and inference on the Hopper platform. Beyond cloud service providers, generative AI has expanded to consumer internet companies, and enterprise, sovereign AI, automotive, and healthcare customers, creating multiple multibillion-dollar vertical markets,” said Jensen Huang, founder and CEO of NVIDIA.
During the earnings conference call, Colette Kress, Executive Vice President and Chief Financial Officer of NVIDIA, mentioned that the company anticipates continued growth opportunities as generative AI expands into more consumer Internet applications.
Meanwhile, the company’s earnings per share came in at $0.61, comfortably beating analysts’ expectations. Its adjusted gross margin expanded sequentially to 78.9% on lower inventory targets.
It’s also noteworthy that the company returned $7.8 billion to shareholders through share repurchases and cash dividends in the first quarter. Notably, Nvidia raised its quarterly cash dividend by 150%.
Looking ahead to the second quarter of fiscal 2025, management anticipates that the company will generate $28 billion in revenue, with a possible variance of plus or minus 2%. Adjusted gross margin is projected to be approximately 75.5%, with a potential variation of plus or minus 50 basis points, and adjusted operating expenses are expected to be around $2.8 billion.
The company is set to announce its fiscal Q2 earnings results after the market closes on Wednesday, Aug. 28. Analysts tracking Nvidia forecast a 136% year-over-year increase in its earnings to $0.59 per share for fiscal Q2 of 2025, with revenue expected to rise 110.91% year-over-year to $28.49 billion. Notably, NVDA has consistently exceeded Wall Street’s EPS estimates in its last four quarterly reports.
Is NVDA Stock Overvalued?
Assessing Nvidia’s valuation, the stock is currently trading at 37.86 times the consensus earnings estimate for FY25, which is higher than the sector median of 24.57x, but still below its five-year average of 47.03x.
Additionally, NVDA’s forward non-GAAP PEG ratio of 1.13 is approximately 39% lower than the sector median of 1.86, and significantly below its five-year average of 2.12.
Therefore, considering its growth prospects, NVDA does not seem to be overvalued.
Options Market Sentiment on Nvidia Stock
Examining the August 30, 2024, option chain, there is a bid/ask spread of $9.20/$9.50 for the $117.00 CALL option and $8.10/$8.80 for the $117.00 PUT option. Remember, this is the options strike nearest to the current stock price. We can estimate the anticipated earnings price movement by using the midpoint prices of these options:
8.45 (117.00 put) + 9.35 (117.00 call) = 17.80/117.02 = 15.2%
Based on current prices, the options market suggests that NVDA stock could potentially rise or fall by approximately 15% from the $117.00 strike price by the August options expiration, using the long straddle strategy. That would place the stock in a trading range of about $99.23 to $134.80.
Additionally, the ratio of open calls to open puts at the $117.00 strike price is approximately 1.43 to 1, with 1,293 open calls compared to 902 open puts. This reflects a bullish sentiment in the options market and suggests a greater probability of the stock's price increasing.
What Do Analysts Expect For NVDA Stock?
Nvidia stock has a consensus “Strong Buy” rating. Out of the 39 analysts covering the stock, 33 recommend a “Strong Buy,” two advise “Moderate Buy,” and the remaining four have a “Hold” rating. The average analyst price target of $141.29 indicates a potential upside of about 20.7% from current price levels.
The Bottom Line on NVDA Stock
All things considered, I believe Nvidia is a solid buy candidate ahead of its next earnings release. Nvidia stock still has potential for growth due to the significant opportunities in GPU sales for data centers, even following the stock’s impressive year-to-date rally.
Also, the recent drop in Nvidia’s stock presents an excellent buying opportunity for those wary of its high valuation. Finally, sentiment in the options market reinforces the overall bullish outlook for the company.
On the date of publication, Oleksandr Pylypenko did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
