The market capitalization of the semiconductor giant Nvidia (NASDAQ:NVDA) passed Amazon's on Wednesday and is quickly closing in on Alphabet (Apple and Microsoft are already nervously looking in their respective rearview mirrors). So will Nvidia move up to third place when it reports earnings next week on February 21st?
Susquehanna's Christopher Rolland, a 5-star analyst ranked in the top 1% of stock professionals on the Street, shook the Magic 8 Ball vigorously and confidently declared, “The signs point to yes.”
Of course not in these exact words. More specifically, Rolland actually said that investors have “high expectations” for Nvidia stock, but also that the company is performing at a high level and will likely deliver a “strong report” next week.
And it better be right.
With a current P/E ratio of more than 95 times earnings, high expectations have been built into the Nvidia share price. In Rolland's view, simply hitting analyst targets for fourth-quarter (fiscal 2024) earnings of $4.56 per share (on revenue of $20.4 billion) will not be enough. To justify the stock's high price, Nvidia needs to deliver a significant increase in profits, with sales at least $1.5 billion above expectations.
So can Nvidia do that?
Perhaps. “Supported by better hyperscale investment forecasts and recent comments from Meta and Tesla indicating they are actively purchasing GPUs from Nvidia,” Rolland expects Nvidia’s data center revenue, which accounts for 80% of Nvidia’s business, to grow in fourth quarter This quarter and beyond will continue to grow strongly. Future demand looks good and the supply situation is also improving, with Nvidia expected to increase production quarterly until the end of next year.
Therefore, at least for now, it looks like Nvidia is able to take full advantage of the soaring demand for its products by selling all the chips the market can consume, even as it increases the prices of the products it sells. This bodes well for gross profit margins – although perhaps not as well as investors hope. Nvidia already generates a gross margin of 74%. It seems unlikely that much more than 75% will be achieved, and in essence the scale only goes up to “100%” (although someone can achieve gross margins in excess of 100%). nowadays it would probably be Nvidia).
Additionally, while Nvidia's data center business is performing well, and since data centers represent a large share of overall revenue, Nvidia's margins are being somewhat impacted by continued weakness in certain other segments, particularly automotive (global electric vehicle sales are, after all, declining ). ).
Ultimately, Rolland predicts that Nvidia will report quarterly revenue of about $21.5 billion next week, which by the analyst's own logic could be a disappointment to investors (less than $1.5 billion above consensus forecast) . In the short term, this could cause Nvidia shares to fall after earnings. Longer-term, however, the analyst still rates Nvidia stock “Positive” (i.e. “Buy”) and sets an $850 price target for the stock, representing a 17% upside for the coming year. (To view Rolland’s track record, click here)
But what does the general market sentiment suggest? Despite a Strong Buy consensus rating supported by 34 Buys and 4 Holds, the average price target suggests a range-bound move for Nvidia shares at $703.30. The upcoming earnings report could prompt analysts to recalibrate their targets, potentially eliminating this discrepancy. (See NVDA stock forecast)
To find good stock trading ideas at attractive valuations, visit TipRanks' Best Stocks to Buy, a tool that unites all of TipRanks' stock insights.
Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is for informational purposes only. It is very important to do your own analysis before investing.