The AI Race Is Gathering Steam. What Will It Mean For Nvidia’s Earnings?

Nvidia (NASDAQ: NVDA) is poised to report its Q1 FY’24 earnings around May 24, reporting on a quarter that is likely to have seen the company’s revenues continue to decline, amid a decline as Covid-19 related tailwinds cool off in the PC and gaming industries. We project that the company’s revenues for the quarter will come in at about $6.5 billion, in line with consensus estimates, and down by about 21% versus last year. We estimate that earnings will come in slightly short of consensus estimates at about $0.90 per share. So what are some of the key trends to watch as Nvidia reports earnings? See our analysis of Nvidia Earnings Preview for a closer look at what to expect when the company reports results.

Over Q4 FY’23, the most recently reported quarter, Nvidia saw its sales to the gaming market decline 46% to $1.83 billion, as sales of desktops, and laptops, cooled versus last year. The trend could continue over Q1 as well, although this could be partly offset by the launch of the GeForce RTX 4070 Ti. We could see a similar downtrend in the Professional Visualization market, which focuses on graphics cards catering to areas such as architecture, engineering, and media. Moreover, PC vendors could potentially work through the existing inventory they built up previously, impacting Nvidia. That said, Nvidia’s data center business – which is now its single largest target market – accounting for about 60% of revenue in the most recent quarter – should continue to fare well, driven in part by tailwinds from an interest in generative AI tools. Nvidia chips are generally perceived to be more advanced and capable than rivals when it comes to AI-related workloads. The company has been looking to develop an ecosystem of sorts around its AI tools, with its own programming languages, and software, which are helping the company to better lock in customers. Over Q4 2023, the company saw sales to the data center market grow by about 11% year-over-year to $3.62 billion and the company has indicated that it was likely to see strong sequential growth over Q2.

So is Nvidia stock a buy ahead of earnings? Although there are tailwinds for Nvidia’s business, given that the company is presently seen as the go-to player for AI-related workloads, we believe the stock is somewhat expensive. Nvidia currently trades at about 63x forward earnings and about 23x sales, which we believe is a relatively rich valuation. Competition in the AI market could mount, with traditional rivals such as Intel and AMD potentially inventing to catch up in this space given the high stakes. Moreover, big tech players such as Google are also doubling down on AI and machine learning-related silicon. We value NVDA stock at about $178 per share, which is about 35% below the current market price. See our analysis on Nvidia Valuation: Is NVDA Stock Expensive Or Cheap? for more details on what’s driving our price estimate for NVDA stock. Also, see our analysis of Nvidia Revenue.

[1] Month-to-date and year-to-date as of 5/10/2023
[2] Cumulative total returns since the end of 2016