The artificial intelligence (AI) boom will get another big test this week.
Nvidia (NVDA 6.18%), the chipmaker that has become the flag-bearer for the generative AI revolution, will report fourth-quarter earnings after hours on Wednesday, and you can bet Wall Street will be standing by with rapt attention.
After all, Nvidia is now up nearly 400% since the start of 2023 and has gained 46% this year alone as its hardware has helped lead the artificial intelligence charge after ChatGPT was launched. Nvidia recently passed Amazon and Alphabet to become the third-most valuable U.S. company with a market cap of $1.8 trillion, behind only Microsoft and Apple.
Nvidia has become the bellwether for the AI boom, so it's only natural to speculate about its upcoming earnings report. Is it the right move to buy the AI stock before its fourth-quarter numbers come out? Let's take a look at the available evidence to see the best decision.
Image source: Getty Images.
What to expect from Nvidia on Wednesday
Nvidia has seen extraordinary demand for its GPUs, accelerators, and other chips that are well suited to run the kind of AI models that make programs like ChatGPT work, and Wall Street has had trouble keeping up with the surge in demand for Nvidia's products.
The chip titan has breezed past Wall Street estimates and typically gives guidance well ahead of the consensus. Wall Street estimates have steadily floated higher for Nvidia in recent months.
For the fourth quarter, analysts expect revenue to skyrocket 237% to $20.4 billion, and see earnings per share jumping from $0.88 to $4.56.
Those are lofty expectations, but they aren't unwarranted. In its third quarter, Nvidia's revenue soared by 206% to $18.1 billion, and it forecast revenue of around $20 billion in the fourth quarter.
Nvidia's partners have smashed estimates
There's also evidence that the AI boom is still picking up speed based on reports from some of Nvidia's partners.
Arm (ARM 4.11%) shares soared after it showed off accelerating revenue growth in its recent earnings report and touted a surge in AI-related demand. Arm licenses its CPU technology to Nvidia, and Arm designs are featured in Nvidia products like the Grace Hopper H200 Superchip, which is a more advanced version of the hugely popular H100 GPU that's been at the center of the AI boom.
Additionally, Super Micro Computer (SMCI 8.89%) shares have gone parabolic since the company reported preliminary results in January that were well ahead of expectations as its revenue doubled in the quarter. The company makes high-density servers and storage solutions that have been in high demand for their AI capabilities, and they run on Nvidia GPUs. Supermicro stock has surged 182% year to date and is up nearly 900% since the start of 2023.
Both of those earnings reports would bode well for Nvidia's update because Arm, Supermicro, and Nvidia are all benefiting from the same trends.
Should you buy Nvidia now or wait until after earnings?
If you're buying a stock, it's best to plan to hold it for at least a year, which offers tax benefits and the advantage of smoothing out the volatility inherent in the stock market.
As Benjamin Graham said, "In the short run, the market is a voting machine, but in the long run, it's a weighing machine." It's easier to be right on a stock's "weight" than its popularity, which helps give an advantage to long-term investors.
It's impossible to know for certain whether Nvidia will go up or down on its earnings report. But if you're buying the stock, you should be buying it because you believe it has sustainable competitive advantages that will enable it to continue to dominate the market for GPUs and AI chips, and use that as leverage to enter new markets such as PCs, which it recently announced plans to do.
There's no shortage of euphoria for Nvidia or other stocks with AI exposure, and several small-cap stocks recently skyrocketed when Nvidia revealed that it had taken small stakes in those companies.
However, the recent surges from Arm and Supermicro indicate the market still seems to be underestimating the potential for AI hardware stocks like Nvidia. If I had to venture a guess, I'd say the stock is more likely to go up than down on the earnings report, and the options market is betting on that as well.
Beyond earnings, Nvidia's competitive advantages seem to be strengthening, and demand for AI applications is likely to expand for the next several years, which will drive demand for its chips.
Even after its monster rally, the stock looks like a smart long-term buy heading into earnings.
