What happened

Shares of semiconductor manufacturer Nvidia (NASDAQ:NVDA) closed higher on Wednesday, responding in sympathy to a powerful earnings release from rival Advanced Micro Devices (NASDAQ:AMD) the previous evening.

So what

On Tuesday, AMD wowed Wall Street with a report of $0.63 per share in pro forma profit -- earnings under generally accepted accounting principles (GAAP) were $0.58 per share -- and sales of $3.85 billion. All of those results were considerably higher than Wall Street had predicted. Further encouraging semiconductors investors was the fact that AMD guided for even higher sales in the third quarter ($4.1 billion, "plus or minus $100 million"), and a repeat of the second quarter's robust 48% gross profit margin to boot.

All of which sounds pretty propitious for Nvidia's own earnings release, due out next month. Responding to the bullish sentiment, investors bid up Nvidia stock more than 2% early in the day, and the stock closed Wednesday trading up 1.5%.  

Green stock arrow shooting up among the numerals 2021

Image source: Getty Images.

Now what

Speaking of Nvidia's Q2 earnings, analysts forecast that when the company reports on Aug. 18, Nvidia will show profits nearly double what it earned one year ago -- $4.09 per share, pro forma. Sales are predicted to come in at $6.3 billion for the quarter, up about 61% year over year.

Assuming all the numbers come in near where they're expected to, analysts have Nvidia pegged for $6.90 per share in earnings this year, valuing the stock at an expensive -- though not extreme -- 28 times current-year earnings. Where things get tricky for the stock is next year, when forecasts have earnings falling by more than half, to roughly $3.23 -- valuing the stock at a much more dangerous 60 times forward earnings.

All of which goes to say: Nvidia may have a fantastic Q2 and even pretty great fiscal 2021, but look out for 2022. That next step down could be a doozy.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.