Up 3x This Year, Will The AI Surge Drive Nvidia Stock Higher Following Q3 Earnings?

Nvidia (NASDAQ: NVDA)  is expected to publish its Q3 FY’24 results on November 21. We expect the company to have another upbeat quarter, as technology companies and developers have been scrambling to deploy generative AI into their applications, driving a windfall for Nvidia, whose high-end graphics processing chips remain the go-to products for AI workloads. We expect Nvidia’s revenue to come in at $15.9 billion, marginally ahead of the consensus estimates and about 2.6x above last year’s number. However, this would be slightly below the company’s guidance of about $16 billion. We expect earnings to come in at roughly $3.21 per share, marginally ahead of consensus estimates. So what should investors expect as Nvidia reports its Q3 2024 results? See our analysis of Nvidia Earnings Preview for a closer look at some of the trends that could drive the company’s results.

In the current financial backdrop, NVDA stock has seen extremely strong gains of 275% from levels of $130 in early January 2021 to around $485 now, vs. an increase of about 20% for the S&P 500 over this roughly 3-year period. However, the increase in NVDA stock has been far from consistent. Returns for the stock were 125% in 2021, -50% in 2022, and 231% in 2023 (YTD).

In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 15% in 2023 (YTD) – indicating that NVDA underperformed the S&P in 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for other heavyweights in the Information Technology sector including AAPL, MSFT, and AVGO, and even for the megacap stars GOOG, TSLA, and AMZN.

In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could NVDA face a similar situation as it did in 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

Demand for Nvidia’s high-end GPUs such as the A100 and H100 has surged driven by demand from the generative AI space. Nvidia’s chips remain meaningfully ahead of rivals such as AMD and Google’s Tensor processing units. Moreover, the company has been looking to develop an ecosystem around its AI tools, with its own programming languages, and software, which are helping the company to lock in customers better. This means that customers who buy into Nvidia’s GPUs will likely continue to remain customers in the long run. Over the previous quarter, Nvidia’s revenue more than doubled year-over-year to $13.51 billion, beating its own guidance of about $11 billion and things are likely to pick up even further over Q3 as supply likely improves. Nvidia said that it had secured substantially larger commitments from its suppliers to meet demand and has indicated that it expects supply to increase each quarter through next year. Moreover, the broader semiconductor market appears to be lackluster with TSMC – Nvidia’s vendor and the world’s largest foundry player – indicating that demand for nearly all semiconductor product categories had weakened except for AI chips. This could potentially give foundry players more room to scale up GPU output. Nvidia is also turning incredibly profitable due to the AI surge. Net income rose over 5x compared to last year to $6.7 billion, as gross margins rose to 71.2% from 45.9% in the year-ago quarter. The company has attributed the increase in margins to higher sales of complex data center products as well as bundled software.

While we think that Nvidia stock could move a bit higher if it beats earnings, we think the stock is slightly overvalued at current levels, trading at about 22x forward sales. This compares to the broader semiconductor industry average price-to-sales multiple of about 4.5x. Even Tesla stock didn’t trade at P/S multiples of these levels at its peak in 2020-2021. Although Nvidia remains in pole position on the market for AI chips, competition in the AI market could mount, with traditional chipmakers 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 at about $410 per share, about 15% below the 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.

[1] Month-to-date and year-to-date as of 11/12/2023
[2] Cumulative total returns since the end of 2016

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