Recent advances in artificial intelligence (AI) are causing a paradigm shift in technology, and the consequences will likely be far-reaching. Nvidia (NVDA +1.67%) has become the de facto standard bearer for the AI revolution, as its state-of-the-art graphics processing units (GPUs) have become the gold standard for training AI models and conducting AI inference.
The accelerating adoption of generative AI has been the catalyst that has sparked parabolic growth for the chipmaker, generating triple-digit sales and profit growth in each of the past four quarters.
Nvidia is scheduled to report the results of its fiscal 2025 second quarter (ended July 30) after market close on Wednesday, Aug. 28, and shareholders will be watching with keen interest. I predict the company will deliver record results, sending Nvidia stock to record heights. Here's why.
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You can't spell Nvidia without AI
Nvidia made a name for itself as a pioneer in the video game industry, developing chips that used parallel processing, or the ability to run a multitude of complex computations simultaneously. This generated lifelike images in video games, revolutionizing the industry. Nvidia adapted this same technology to handle the raw, number-crunching needs of AI and quickly cornered the market in this emerging technology.
The vast majority of AI processing takes place in data centers, and Nvidia has already proven its worth at zipping information through the ether. The company controlled an estimated 98% of the data center GPU market last year, according to data compiled by semiconductor analysts at TechInsights.
The growing demand for AI has data center and cloud operators spending heavily to upgrade their capabilities to handle the rigors of AI processing. Making AI available to the masses is expected to unleash a wave of productivity that's expected to add trillions of dollars to the global economy.
While Nvidia had a head start in this emerging industry, the company isn't resting on its laurels. Earlier this year, the company unveiled its Blackwell architecture, which contained a host of new technology that promises to take AI to the next level.
Perhaps more impressive is the GB200 Grace Blackwell Superchip, which connects two B200 GPUs with an Nvidia Grace CPU to form "the world's most powerful chip" for AI.
While there have been reports of a potential launch delay, more recent reports suggest Nvidia is still on track to begin shipping its next-generation AI chip early next year.
This all helps to illustrate that Nvidia has no plans of ceding its strategic advantage or market-leading position anytime soon.
NASDAQ: NVDA
Key Data Points
Why its second-quarter financial report will be a key catalyst
Nvidia has proven its mettle over the past year, but investors are looking to the future. Concerns about inflation and the growth of the economy have taken center stage in recent weeks, with economists debating whether the Federal Reserve Bank has waited too long to lower interest rates or whether it can still engineer a soft landing -- bringing inflation under control, without tipping the economy into a recession. Those fears have begun to subside, so investors are turning their sights to Nvidia, which is widely viewed as a bellwether for the state of AI adoption.
A look back at Nvidia's outlook in recent quarters can provide much-needed insight into what investors should expect next week. In each of the past four quarters, Nvidia has delivered triple-digit growth, which has outpaced its own guidance, and in each instance by a fair margin. Nvidia's revenue growth has sailed past its outlook by a margin of between 8% and 19%, which suggests the company's current forecast is equally conservative.
For its fiscal 2025 second quarter (ended July 30), Nvidia is guiding for revenue of $28 billion, representing an increase of 107% year over year. Wall Street is even more enthusiastic, with analysts' consensus estimates rising to $28.6 billion. Even that may end up being conservative, as Nvidia has surpassed investor expectations for sales and profits in each of the past four quarters -- again by a fair margin.
If Nvidia beats its own revenue guidance by at least 8% or more -- which it has done in each of the preceding four quarters -- that would put its revenue at $30 billion or more. If that's the case, it will likely come with a commensurate increase in its guidance, resulting in a classic "beat and raise." Since this is almost always a bullish signal, the stock price will likely jump in response.
To be clear, investors will be watching Nvidia's forward-looking guidance for evidence the secular tailwind of AI is still blowing strong. Based on the available evidence and using history as a guide, I predict that Nvidia will deliver record-breaking results and surpass expectations, sending its stock to new heights.
Is the stock worth the price?
Thanks to Nvidia's superb results, there's been a commensurate increase in its valuation. Analysts and investors alike have been scrambling to decide how best to value Nvidia stock, but we're in unchartered territory here. Nvidia generated revenue of $61 billion in fiscal 2024 (ended Jan. 28), an increase of 126%. Growth of that magnitude is certainly deserving of a premium, but there's no consensus regarding the size of said premium.
Data by YCharts
Nvidia is currently selling for 75 times earnings, but that number is about to see a dramatic reset after the company delivers its financial report, as new, higher profits are factored into the ratio. The chart clearly shows the stark decline in the wake of each of its three previous financial reports in November, February, and May, respectively.
While some investors might balk at paying in the neighborhood of 50 times earnings (represented by the dips in the stock chart), I would argue that's a fair price to pay for a company delivering triple-digit growth and leading the fourth industrial revolution.
