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Nvidia Needs Supersized Earnings Beat to Keep Rally Alive: Here's What to Watch

Published 05/22/2024, 10:10 AM
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  • Nvidia will publish its quarterly results after the closing bell today.
  • Higher-than-ever expectations mean the chip maker has no margin for error.
  • Models and analysts indicate limited upside potential to NVDA after a 92% rally this year.
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  • Tech giant Nvidia (NASDAQ:NVDA) is getting ready to step into the earnings spotlight today after the market closes.

    The chipmaker is reporting results later than most major tech companies typically report, but anticipation remains higher than ever nonetheless.

    Analysts believe Nvidia's results could have a ripple effect on the entire market. Strong financial performance from the AI powerhouse could fuel a continued rally in tech stocks.

    Nvidia's dominance in the AI space is undeniable. Its powerful chips are instrumental in driving cutting-edge technologies like Google)'s Gemini language model and OpenAI's ChatGPT chatbot.

    A stellar earnings report could further solidify Nvidia's position and send a positive signal to the broader technology sector.

    Nvidia has no room for error amid higher-than-ever expectations

    Concerning consensus forecasts for tonight's results, analysts are expecting an average EPS of $5.58 according to InvestingPro data, i.e. almost 5 times higher (+411% ) than in the same quarter last year.Previous Results

    Source: InvestingPro

    • Sales are forecast at $24.59 billion, up +242% year-on-year.
    • Analysts have also raised their EPS estimates by 308.43 % over the past 90 days.

    However, there are whispers that the figures will be even better than this official consensus predicts. In a note published last Sunday, analysts at Evercore ISI called it "Wall Street's worst-kept secret" that Nvidia will beat expectations on both earnings and sales.

    It's true that for some time now, Nvidia has accustomed investors to exceeding expectations, sometimes by a wide margin. The company has exceeded EPS and sales expectations for the last 5 consecutive quarters.Earnings History

    Source: InvestingPro

    In other words, figures in line with consensus (or an overshoot on EPS and a disappointment on sales, or vice versa) could be taken as bad news and could send the stock tumbling.

    Another risk to consider is the company's forecasts for the coming quarters. Indeed, cautious guidance could cancel out the positive impact of exceeding expectations.

    Upside potential remains limited after rallying 92% this year

    This is all the more true given that Nvidia shares are currently close to their all-time highs, up 92% year-to-date and 206% year-on-year, so it wouldn't take much to trigger a wave of profit-taking.

    What's more, most valuation models consider the stock to be overvalued. The InvestingPro Fair Value, which uses several recognized financial models, puts Nvidia at $788, i.e. 17.4% below the current share price.

    Fair Value

    Source: InvestingPro

    Analysts, though more optimistic, assign an upside potential of only 8.9% to the stock, with an average target of $1038.98. Beyond tonight's results, the question of Nvidia's continued growth in the longer term arises, as the competition gathers pace and catches up.

    In addition to direct competitors AMD (NASDAQ:AMD) and Intel (NASDAQ:INTC), Nvidia will soon be facing competition from its customers, since most of its biggest outlets, such as Amazon (NASDAQ:AMZN), Meta (NASDAQ:META) and Microsoft (NASDAQ:MSFT), are currently working on their own AI chips.

    Should we buy or avoid the stock ahead of results?

    While it's not out of the question for Nvidia shares to make new highs if tonight's results exceed expectations, there are arguably better opportunities for investors interested in technology stocks and who adopt a medium-to-long-term investment horizon.

    However, it's difficult to guarantee a rise in NVDA even if it exceeds expectations, given that expectations could be even higher than the consensus suggests.

    Even the slightest disappointment could trigger a violent downward reaction, not just from Nvidia, but from the market as a whole.

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    Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, counsel or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple perspectives and is highly risky and therefore, any investment decision and the associated risk remains with the investor.

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