Nvidia Q2 Earnings Preview: Will The Momentum Hold Up?

Nvidia (NASDAQ: NVDA) is expected to publish its Q2 FY’25 results on August 28. We expect the company to have another solid quarter, as Nvidia’s high-end graphics processing chips, which are currently the gold standard for running generative AI workloads, see strong demand. We expect Nvidia’s revenue for the quarter to come in at $28.55 billion, roughly in line with consensus estimates and 2.1x last year’s number. We expect earnings to come in at roughly $0.64 per share, marginally ahead of consensus estimates and up from $0.27 in last year’s quarter. So what should investors look forward to as Nvidia reports its Q2 FY’25 earnings? See our analysis of Nvidia Earnings Preview for a closer look.

Nvidia’s data center business is likely to remain the primary driver of the company’s earnings for the quarter, led by the Hopper GPU computing platform and the InfiniBand end-to-end networking solutions as customers across various industries have been investing in training and interfacing generative AI and large language models. While cloud players have been the biggest customers of AI chips, demand has been expanding to consumer internet players, enterprise players, and healthcare customers, according to Nvidia. Over Q1 FY’25, sales from Nvidia’s data center segment surged to $22.6 billion, rising almost 5x year-over-year. Supply for Nvidia’s Hopper products is also improving, and this is likely to help sales over Q2.  We will be looking for updates on the company’s next-generation Blackwell chips. While the chips were slated to launch around October this year, a report by The Information indicated that the chips could be delayed due to a recently discovered design flaw.

Nvidia is also becoming extremely profitable due to the AI surge. Net income over Q1 rose to $14.881 billion up 7x year-over-year. Things could remain strong over Q2 as well, as Nvidia benefits from favorable component costs and better scale.  For Q2, Nvidia is guiding for adjusted gross margins of around  75.5%, plus or minus 50 basis points.  Nvidia could also benefit from a more favorable product mix skewed toward complex data center products and higher software-related sales.

NVDA stock has seen extremely strong gains of 710% from levels of $13 in early January 2021 to around $105 now, vs. an increase of about 40% 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 239% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – 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 ORCL, and even for the mega-cap 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?

Looking at Nvidia’s current market price of $105 per share, the stock now trades at about 38x consensus FY’25 earnings and 28x FY’26 earnings. This is not an unreasonable multiple, considering Nvidia’s heady growth. That said, there are risks as well. Firstly, the big surge in GPU demand that we are currently seeing could potentially ease, as the initial training phase of AI large language models slows down. After the training of models, the phase of utilizing these models could shift toward lower-power requirements, or potentially even on-device capabilities, reducing demand growth for GPUs. Competition is also mounting.  Players such as AMD are investing considerably to catch up in this space given the high stakes. We value NVDA stock at $89 per share, about 15% 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.

[1] Returns as of 8/11/2024
[2] Cumulative total returns since the end of 2016

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