NVIDIA Corporation (NVDA) has been one of the biggest beneficiaries of buzz around generative AI, with its stock rallying more than 220% year-to-date. The massive demand for its graphic processing units (GPUs) to power generative AI led the company to raise its outlook for the second quarter.

With the company set to report its second-quarter results tomorrow, will it be able to meet its projections and the Wall Street estimates? Irrespective of how the company performs compared to the estimates, I think waiting for a better entry point in the stock could be prudent for reasons discussed throughout this article.

As generative AI is expected to be revolutionary for businesses and consumers, NVDA finds itself in a sweet spot. The company’s GPUs are crucial to run large computers processing data and powering generative AI.

NVDA reported higher-than-expected revenue and earnings during the first quarter, but what really surprised the Street was its stronger-than-expected forecast for the second quarter. NVDA expects its revenue to be $11 billion, plus or minus 2%. The revenue forecast was more than 50% higher than Wall Street estimates of $7.15 billion. The company expects non-GAAP gross margins to be 70%, plus or minus 50 basis points.

NVDA CEO Jensen Huang said the company saw “surging demand” for its data center products. The company said that demand for its GPU chips was from cloud vendors and large consumer internet companies. The massive increase in interest in AI has been driving demand for NVDA chips.

The demand for NVDA chips is such that Tesla, Inc. (TSLA) CEO Elon Musk said that the automaker would take as many NVDA GPUs as the company can produce. However, there are signs that NVDA might not be able to supply enough GPUs to meet the surging demand.

Street expects NVDA’s EPS and revenue to increase 309.1% and 65.2% year-over-year to $2.09 and $11.07 billion, respectively. Forrester analyst Glenn O’Donnell said, “What Nvidia reports in its upcoming earnings release is going to be a barometer for the whole AI hype. I anticipate that the results are going to look really outstanding because demand is so high, and that means Nvidia is able to command even higher margins than it would otherwise.”

The stock has gained 206.6% over the past nine months and 163.1% over the past year to close the last trading session at $469.67.

Here’s what could influence NVDA’s performance in the upcoming months:

Favorable Analyst Estimates

Analysts expect NVDA’s EPS for fiscal 2024 and 2025 to increase 145.1% and 44.5% year-over-year to $8.19 and $11.83, respectively. Its fiscal 2024 and 2025 revenues are expected to increase 63.8% and 34.3% year-over-year to $44.19 billion and $59.35 billion, respectively.

Stretched Valuation

In terms of forward EV/EBITDA, NVDA’s 54.10x is 266.2% higher than the 14.77x industry average. Likewise, its 24.08x forward EV/S is 772.7% higher than the 2.76x industry average. Its 52.99x forward non-GAAP P/E is 131.5% higher than the 22.89x industry average.

High Profitability

In terms of the trailing-12-month net income margin, NVDA’s 18.52% is 821% higher than the 2.01% industry average. Likewise, its 23.53% trailing-12-month EBITDA margin is 162.8% higher than the industry average of 8.96%. Furthermore, the stock’s 6.65% trailing-12-month Capex/Sales is 174.3% higher than the industry average of 2.42%.

POWR Ratings Reflect Uncertainty

NVDA has an overall rating of C, equating to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. NVDA has an F grade for Value, consistent with its stretched valuation.

It has an A grade for Sentiment, in sync with its favorable analyst estimates. Its B grade for Quality justifies its high profitability.

NVDA is ranked #43 out of 92 stocks in the Semiconductor & Wireless Chip industry. Click here to access NVDA’s Growth, Momentum, and Stability ratings.

Bottom Line

The massive demand for its GPUs could help NVDA meet its revenue and earnings estimates in the second quarter. Also, the company’s long-term prospects look extremely promising, given the surging demand for AI at individual, enterprise, and hyper-scale levels.

However, the stock is trading at an expensive valuation now. Therefore, it could be wise to wait for a better entry point in the stock.

How Does NVIDIA Corporation (NVDA) Stack Up Against Its Peers?

NVDA has an overall POWR Rating of C, equating to a Neutral rating. Check out these stocks from the Semiconductor & Wireless Chip industry with an A (Strong Buy) or B (Buy) rating: Renesas Electronics Corporation (RNECF), Photronics, Inc. (PLAB), and Infineon Technologies AG (IFNNY).

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NVDA shares were trading at $464.32 per share on Tuesday morning, down $5.35 (-1.14%). Year-to-date, NVDA has gained 217.81%, versus a 15.83% rise in the benchmark S&P 500 index during the same period.

About the Author: Dipanjan Banchur

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets. More...

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