One of the most profound changes in the tech landscape over the past couple of years has been the advancements in the field of artificial intelligence (AI). There's a strong argument that the advent of AI early last year was one of the biggest sparks that set off the current bull market rally. ChatGPT heralded the advent of generative AI, and since its release in November 2022, the S&P 500 has jumped 46%, while the Nasdaq Composite has surged 67% (as of this writing).
While there have been plenty of beneficiaries of these secular tailwinds, one of the most notable has been Nvidia (NVDA -2.09%). In a nutshell, the company's graphics processing units (GPUs), which were originally developed to craft lifelike images in video games, proved equally adept at powering AI models. The resulting run on Nvidia's chips fueled incredible financial results and sent the stock into the stratosphere. Since the beginning of last year, Nvidia stock is up more than 900% (as of market close on Thursday), turning the company into a stock market darling.
Nvidia has a lot riding on its financial results next week. Let's look at the run-up to this critical quarter, what Wall Street is saying, and what investors should expect.
Image source: Getty Images.
Paint by numbers
As technologists began to understand the implications of generative AI in early 2023, demand for Nvidia's AI-centric processors went from zero to 60 in just months. In the company's fiscal 2024 second quarter (ended July 30), the results were nothing short of astounding. Nvidia delivered record revenue of $13.5 billion, up 101% year over year, while its adjusted earnings per share (EPS) of $2.70 soared 429%. EPS in terms of generally accepted accounting principles (GAAP) were even more striking, up 854%.
The next four quarters were equally impressive, with record-setting, triple-digit sales and profit growth in each one. Nvidia's fiscal 2025 second quarter (ended July 28), was the latest in the streak. Record revenue of $30 billion jumped 122% year over year, while adjusted EPS of $0.68 soared 152%. It's worth noting that investors had concerns about Nvidia's gross margin, which ticked lower, but that was from a record high set in the second quarter.
Astute investors knew the company's triple-digit streak would eventually come to an end, and management suggested that time has come. For the soon-to-be-announced third quarter (ended Oct. 29), Nvidia is guiding for revenue of $32.5 billion, which would represent year-over-year growth of 79%.
That would mark a distinct slowdown compared to its recent growth rate, and the stock initially sold off on the news. However, in the three months since that report, cooler heads have prevailed, and Nvidia stock is back near record highs.
The biggest driver for Nvidia's future results is the upcoming release of its AI-centric Blackwell architecture. After a slow start due to production issues, management has confirmed that the chips are on track to ship by the end of the year. CEO Jensen Huang said in an interview that demand for the processors was "insane." He went on to say, "Everybody wants to have the most, and everybody wants to be first." CFO Colette Kress had previously stated, "In the fourth quarter, we expect to ship several billion dollars in Blackwell revenue."
Nvidia's strong record of innovation has kept the company at the forefront of the AI revolution, and it appears that won't be changing anytime soon.
What Wall Street is saying right now
Heading into Nvidia's critical report next week, Wall Street remains decidedly bullish. Analysts' consensus estimates are calling for revenue of $33 billion -- or growth of about 82%. Nvidia has a strong track record of beating its own expectations and that of Wall Street, so the results could be more robust.
Of the 63 analysts who offered an opinion on Nvidia thus far in November, 94% rate the stock a buy or strong buy, and none recommend selling. The average price target of $157 suggests the stock has upside of 11%. The consensus buy rating and price target above the current stock price suggests that analysts believe Nvidia stock has additional upside, though not to the same degree as it has over the past year.
However, over the past few days and heading into Nvidia's earning report, there's been a mad dash by analysts to update their models, resulting in numerous price target increases this week (12, by my count). Every one of these price target increases has been higher than the current consensus of $157, suggesting Wall Street is getting even more bullish.
The analysts were nearly unanimous in their commentary, citing the rapid adoption of AI and the build out of more robust data centers to handle the surging demand. Furthermore, most analysts believe Nvidia was conservative with its guidance, giving the company room to surpass expectations.
One of the more bullish takes comes courtesy of Melius Research analyst Ben Reitzes. He maintained a buy rating on the stock and increased his price target to $185. "While it didn't seem possible, we are even more excited about Jensen Huang's next chip than we were before," he wrote in a note to clients earlier this week.
For investors tempted to sell the stock, the analyst says, "Giving up on Nvidia here after its hit -- Hopper [AI chip] -- is like giving up on Apple at iPhone 1 or 2." He went on to call this a "once-in-a-lifetime opportunity," saying Nvidia is a "must own."
What it all means
Taken together, this suggests that Wall Street remains remarkably bullish on Nvidia's prospects -- and with good reason. Even the most conservative estimates regarding the market opportunity represented by generative AI generally start at about $1 trillion, and many are much higher. Competitors have thus far been unable to develop a solution that even comes close to Nvidia in terms of performance, so its GPUs are building the foundation of the AI revolution.
To be clear, I'm bullish on Nvidia and believe the stock has much further to climb from here. That said, I'm also cognizant of the volatility that's sure to follow in the weeks and months to come. If you have any doubts, remember that earlier this summer, Nvidia stock shed 27% of its value in a few short weeks, only to come roaring back to set new all-time highs.
Finally, there's the valuation to consider. Wall Street is predicting Nvidia will generate EPS of $4.16 in its fiscal 2026, which begins in late January. That means the stock is currently selling for roughly 34 times next year's earnings. While that's a slight premium, consider this: Nvidia's revenue has increased by 868% over the past five years, while its net income has risen 1,650%. This has fueled a stock price surge of 2,610% (as of this writing). That illustrates quite clearly why Nvidia is deserving of a premium.
We'll know more after Nvidia reports its results after the market close on Wednesday, Nov. 20.
