Shares of Nvidia (NVDA 3.30%) shot up 36% on the stock market in the past month after suffering a brutal sell-off for most of the year. The rally seems a tad surprising -- the chipmaker issued a terrible outlook in August thanks to the weakness in the personal computer (PC) market, which hamstrung its gaming business.
It is also worth noting that the restrictions on sales of high-performance data center chips to China created another headwind recently that led Nvidia to cut its revenue guidance by $400 million for the fiscal third quarter. But investors seem to be ignoring Nvidia's problems and are buying the stock, as the latest rally indicates.
With Nvidia set to release its fiscal 2023 third-quarter results after the market closes on Wednesday, Nov. 16, should investors continue buying the stock in anticipation of more upside? Or will the above-mentioned headwinds bring the stock's impressive rally to a halt when it releases its quarterly results, suggesting that it may be too late to buy Nvidia? Let's find out.
Nvidia faces an uphill task to satisfy investors
Analysts expect Nvidia to deliver $5.8 billion in revenue in the fiscal third quarter. The company guided for $5.9 billion in revenue at the midpoint of its guidance range in August, but the $400 million hit that Nvidia anticipates on account of sales restrictions to China means that its revenue should land at $5.5 billion.
So the odds are stacked against Nvidia going into the quarterly report. The company delivered $7.1 billion in revenue in the third quarter of fiscal 2022, which means we could be looking at a 20%-plus year-over-year decline in revenue. The $5.8 billion consensus estimate suggests that analysts anticipate a smaller decline.
There are a couple of reasons why Nvidia may be able to deliver better-than-expected results. First, it looks like the company's latest RTX 40 series graphics cards are in demand. Nvidia's flagship RTX 4090 graphics card, which retails for $1,599, is out of stock, both online and in physical retail stores, suggesting that the demand for high-end gaming equipment is probably coming back. What's more, Nvidia's rival Advanced Micro Devices reportedly doesn't have a graphics card that could compete with the former's flagship offerings.
So there may be chances of a turnaround in Nvidia's video gaming business, which saw a 33% year-over-year decline in revenue in the fiscal second quarter.
The second reason why Nvidia could spring a positive surprise is because of its data center business. The company developed a new data center graphics processing unit (GPU) that should help it cater to Chinese customers without falling foul of the U.S. government's restrictions. Moreover, Nvidia CEO Jensen Huang pointed out in the wake of the restrictions on sales of its top two data center chips to China that there is still a lot of room for the company to sell its products over there.
In simpler words, there are multiple Nvidia data center chips that could still be sold in China, and the company found a way to broaden its portfolio in that market. So there are chances that Nvidia's results may be better than what Wall Street is looking for, and that could help the stock sustain its recent rally.
Still on shaky ground
Investors, however, shouldn't forget that Nvidia's turnaround may take some time to materialize. Analysts aren't upbeat about the company's near-term prospects, anticipating a 20% year-over-year decline in revenue in the ongoing fiscal fourth quarter, along with a sharp drop in earnings.
That's not surprising, as the PC market recovery is expected to happen only in 2024, which means that the gaming business could remain under pressure. Of course, Nvidia's entry into the server processor market in 2023, its growing backlog in the automotive business, and traction in fast-growing niches such as digital twins could help it mitigate the weakness in the gaming market -- but it may take some time for the company to step on the gas.
That's why investors who missed Nvidia's latest rally shouldn't jump onto the stock right now, especially considering its steep valuation. The semiconductor stock trades at a rich 51 times earnings following its latest surge. A weak earnings report or guidance could send the stock tumbling and give investors an opportunity to buy this potential long-term winner at a cheaper valuation.
