Shares of Nvidia (NVDA 6.98%) have already clocked handsome gains of 81% in 2024 thanks to the stellar quarterly results the company delivered earlier this year, which cemented its position as the pioneer in the market for artificial intelligence (AI) chips.
Analysts and investors now eagerly wait for May 22, when the company will release its fiscal 2025 first-quarter results (for the three months ending April 28, 2024). There is good news for Nvidia investors heading into the next earnings report as Goldman Sachs increased its price target on the stock to $1,100 from $1,000, implying a 22% upside from current levels.
Analyst Toshiya Hari predicts that Nvidia's earnings estimates are likely to be revised higher thanks to recent AI-related developments that point toward robust demand for the company's chips. The Goldman analyst points out that positive results from chipmakers churning out AI chips, higher spending by the likes of Amazon and Meta Platforms on building AI infrastructure, and the strong demand for AI servers are some of the reasons why Nvidia is set for more upside.
Here are three reasons why Nvidia is set up for a solid quarterly report on May 22, and one specific additional reason why buying this semiconductor stock before that date could turn out to be a smart move.
1. Nvidia's foundry partner says that AI-powered demand is "insatiable"
Nvidia is a fabless semiconductor company, which means that it only designs its chips. The manufacturing part, however, is taken care of by foundries such as Taiwan Semiconductor Manufacturing (TSM -0.37%), popularly known as TSMC.
It is worth noting that TSMC has been rapidly expanding its ability to produce advanced chips to help Nvidia meet AI-related demand from customers. As a result, Nvidia now accounts for an estimated 11% of TSMC's total revenue and reportedly paid the Taiwan-based foundry giant $7.7 billion last year for its services.
Therefore, TSMC's results for the first quarter of 2024 can give us an idea of how Nvidia's results may look like. The good part is that TSMC's revenue in the first quarter of 2024 was up 16.5% year over year. More importantly, TSMC got 37% of its revenue from sales of 5-nanometer (nm) chips last quarter, up from 31% in the same period last year.
Nvidia uses TSMC's 5nm process to make its popular H100 processor. TSMC's 5nm revenue increased an impressive 35% year over year, so there is a solid chance that Nvidia continued purchasing AI chips at a nice clip from its foundry partner last quarter to meet the "insatiable AI-related demand" as TSMC management pointed out on the latest earnings conference call.
As such, TSMC's quarterly performance should give Nvidia bulls the confidence that the graphics specialist is capable of delivering another solid set of results later this month.
2. AI server demand remains robust
Super Micro Computer (SMCI -1.04%) is a manufacturer of AI servers. Its server solutions are used for deploying AI chips from Nvidia and others, so the company's results provide yet another indication of outstanding results from Nvidia on May 22.
Supermicro's revenue tripled to $3.85 billion in the previous quarter from $1.28 billion in the same period last year, driven by strong demand for the company's AI servers. More specifically, Supermicro gets more than half of its revenue from selling AI-specific servers. So, the sharp spike in its revenue in the latest quarter indicates that the demand from data centers for servers used for mounting AI chips was very healthy.
Even better, Supermicro has raised its full-year forecast and expects its fiscal 2024 revenue to more than double from the previous year, indicating that the demand for AI chips is likely to remain strong going forward. This bodes well for Nvidia's guidance as the company controls more than 90% of the AI chip market, and a better-than-expected outlook should ideally pave the way for more gains following the company's upcoming results.
3. Nvidia's competitors have raised their AI-related revenue expectations
Though Nvidia holds a monopoly-like position in the AI chip market, it is not the only company that's looking to capitalize on this fast-growing space. Intel and Advanced Micro Devices have been trying to cut their teeth in the AI chip market.
The latest results from these chipmakers are proof that the demand for AI chips remains robust. AMD, for instance, is expecting to sell at least $4 billion worth of AI chips in 2024, up from its prior estimate of $3.5 billion. It is also worth noting that AMD was expecting 2024 AI chip sales to come in at $2 billion in December last year, but it looks like it is witnessing stronger-than-expected demand.
Similarly, Intel is expecting the launch of its new Gaudi 3 AI accelerator to drive $500 million in revenue in the second half of the year, followed by "increasing momentum into 2025." These comments from Nvidia's competitors aren't surprising as the market for AI chips is reportedly growing at an annual rate of 30%, a pace it is expected to sustain for the next decade.
Market research firm Omdia, meanwhile, is expecting Nvidia's AI revenue to increase to a whopping $87 billion in 2024 from $34 billion last year as the company is expected to continue dominating this market. In all, the AI chip market's secular growth this year and Nvidia's huge market share place the company in a solid position to deliver a solid set of results and follow the same up with impressive guidance.
4. The valuation makes buying Nvidia stock a no-brainer before its earnings
Nvidia's red-hot rally in the past 18 months explains why it is trading at 76 times trailing earnings. However, as the following chart shows, the chip giant's earnings multiple has actually fallen since the beginning of 2023 on the back of its eye-popping earnings growth.
NVDA EPS Diluted (TTM) data by YCharts
In other words, Nvidia has justified its rich earnings multiple with outstanding growth on the bottom line. Additionally, the stock's forward earnings multiple of 37 is lower than its five-year average earnings multiple of 39. Moreover, Nvidia's price/earnings-to-growth ratio (PEG ratio) stands at just 0.13. This is another indicator of Nvidia being undervalued with respect to the growth that it is forecast to deliver, as a PEG ratio of less than 1 strongly suggests a stock is trading for less than what it is worth.
All these points make it clear that Nvidia's impressive stock market rally could get a nice shot in the arm following its upcoming earnings report on May 22. That's why investors who haven't bought this AI stock yet should consider doing so before its quarterly report is released so that they don't miss out on more upside that it could deliver.
