Nvidia (NVDA +0.87%) has been the undisputed beneficiary of recent advances in artificial intelligence (AI). Since early last year, the adoption of AI has spread like wildfire, fueled by Nvidia's graphics processing units (GPUs). The company will face a key hurdle when it reports its first-quarter earnings after the market close on Wednesday, and Wall Street will be sitting on the edge of its seat to parse the results.
The stock has gained an incredible 548% since the start of last year (as of this writing), fueled by strong and accelerating demand for AI. Nvidia has been the unofficial standard bearer of the AI revolution, but investors are beginning to wonder if the trend can continue at its recent breakneck pace.
With the scene set, should investors buy Nvidia stock before its highly anticipated first-quarter report? Let's examine the available evidence.
Image source: Getty Images.
A make-or-break quarter?
The initial excitement has worn off in recent months and investors are no longer taking the AI revolution on faith. Yet, the major cloud services have been vocal about the ongoing demand for generative AI and their plans to boost investment in the space.
Microsoft increased its capital expenditures by 79% to $14 billion in the calendar first quarter, while Alphabet's spending grew by 90% to $12 billion. Amazon spent $14 billion in the first quarter, which it expects will be the low point of spending for the year, expecting capex spending to "meaningfully increase" thanks to AI.
Since data centers and cloud infrastructure providers are among Nvidia's largest customers, that would seem to bode well for the company's upcoming report.
For its fiscal 2025 first quarter (ended April 30), analysts expect Nvidia's sales to surge 277% to $24.6 billion, with earnings per share (EPS) jumping from $0.83 to $4.57.
While results of that magnitude might seem unlikely, consider this: in the fourth quarter, Nvidia generated record revenue that jumped 265% to $22.1 billion, and its outlook is calling for Q1 revenue of $24 billion -- and its guidance tends to be conservative.
Is the writing on the wall?
Several AI-centric companies have reported results in recent weeks, and the market's reaction has been puzzling, to say the least.
Earlier this month, AI software and data-mining specialist Palantir Technologies (PLTR +1.32%) reported first-quarter revenue that grew 21% year over year and 4% sequentially to $634 million, while its adjusted EPS jumped 60%. Wall Street found its guidance lacking, however, and the stock fell 15% on the day following its report.
For its fiscal 2024 fourth quarter (ended March 31), chip designer Arm Holdings (ARM 3.98%) reported revenue that grew 47% year over year to $928 million, while adjusted EPS of $0.36 soared 1,700% (not a typo). Despite the surge in both sales and profits, investors were hoping for more robust guidance, and the stock fell 2% following the release of its results.
For its fiscal 2024 third quarter (ended March 31), AI-centric server maker Super Micro Computer (SMCI +3.18%) delivered record revenue that jumped 200% year over year to $3.85 billion, while adjusted EPS soared 308% to $6.65. Despite raising its guidance, Wall Street wanted more, and the stock tumbled 14% on the day following its report.
Eagle-eyed investors will have noticed a pattern emerging. Despite strong, expectation-beating results, Wall Street is looking to the future and taking a wait-and-see approach.
These results suggest that while demand for AI remains high, investors are not only demanding stellar results but looking for robust guidance to confirm that the secular tailwinds of AI continue to blow.
Should you buy Nvidia stock now or wait until after earnings?
How you answer this question depends on what type of investor you are. For those looking to buy ownership in a business with a strong track record of execution, savvy management, and technological tailwinds, and have plans to hold it for the long term, then Nvidia might just be the stock for you.
If, however, you're looking to jump into the stock before earnings in the hopes that it will pop so you can make a quick exit, then Nvidia might end up being a disappointment. Truth be told, there's simply no way to know for sure whether Nvidia stock will go up or down after it reports on Wednesday.
If I were to hazard a guess, I'm inclined to think that investors continue to underestimate the continuing strong deman for AI and the fundamental changes it will bring to the fore. That said, unless Nvidia significantly boosts its guidance, the stock could tumble.
That said, Nvidia has shown a knack for skating to where the puck is going rather than where it's been. The company continues to spend heavily on research and development, which amounted to 20% of its 2023 revenue. Nvidia is already working on the next generation of industry-leading AI processors, which is how it stays so far ahead of the competition.
Finally, there's the matter of Nvidia's valuation. At 79 times trailing 12-month earnings, the stock might seem exorbitantly expensive if not for three consecutive quarters of triple-digit growth, with another likely on the way. However, Nvidia is selling for 38 times next year's earnings, and while that's a bit on the high side, it's justified by the company's meteoric growth.
However, for those looking beyond the current quarter, I believe Nvidia's track record and history of innovations speak for itself, making it a buy for investors intending to hold for years if not decades.
