• Nvidia earnings will be out on August 28 after market close

• Analysts expect triple-digit growth in revenue and earnings

• Stock up around 160% in 2024, valuation retains reasonable premium

 

Nvidia has another stellar year

Nvidia has been the top-performing stock of the S&P 500 this year, rising by more than 160%. Clearly, the firm has been capitalising on the strong demand for its AI chips as they appear to be essential tools for all leading players in the Artificial Intelligence (AI) race.

Besides its fundamentals, markets will be laser-focused on the firm’s forward guidance given that it is lately considered a proxy for the broader health of the tech sector. In all its five previous earnings calls, Nvidia topped projections by a wide margin, but its stock failed to rally only on the one coupled with cautious forward guidance.

Undoubtedly, Nvidia’s position in the corporate world has been upgraded as its exponential rally has largely contributed to the S&P 500’s consecutive fresh all-time highs. Other than that, Nvidia is now the third largest company globally in market capitalization but had also reached the first position back in June.

Risks

Given Nvidia’s dominant position in the semiconductor industry, it's highly unlikely that its Q2 financials could disappoint. Hence, attention might fall to existing downside risks, which could undermine its growth prospects moving forward.

Firstly, up until now, markets seem to be solely focused on the demand side of the GPU market, neglecting that Nvidia’s production is subject to supply constraints. Additionally, the leading chipmaker is caught in the US-China crossfire, a situation that could escalate further in case of a Trump win. Meanwhile, TSMC is a big supplier of Nvidia, thus geopolitical tensions between Taiwan and China should be on investors' radar.

What’s more worrisome though is that big tech firms such as Amazon, Meta, Microsoft and Google are actively seeking ways to reduce their reliance on Nvidia by developing in-house products. On the one hand, this means that Nvidia cannot keep growing at the current pace forever. Nevertheless, these plans demand heavy investment and time, allowing Nvidia’s software to become so entrenched that companies might stick with it even if better alternatives arise.

Magnificent fundamentals

Another outstanding financial quarter is expected for Nvidia as the AI trend keeps expanding rapidly. The semiconductor designer is expected to post revenue of $28.60 billion for the second quarter of 2024 according to consensus estimates by LSEG analysts, which would represent a massive year-on-year growth of 111.7%. Additionally, earnings per share (EPS) are estimated at $0.64, marking a stunning 137% increase on an annual basis.

Reasonable premium

Nvidia has delivered a series of upbeat earnings reports in the past couple of years, repeatedly exceeding market expectations. This has led analysts to continually revise the firm’s forward earnings expectations higher and higher, driving its price-to-earnings (P/E) ratio even below that of the tech-heavy Nasdaq in early 2024.

Although the persistent stock rally has sent Nvidia’s valuation back at ‘pricey’ levels, the current premium seems justified given its dominant position within the AI space. Specifically, Nvidia’s 12-month forward (P/E) ratio, which denotes the dollar amount someone would need to invest to receive back one dollar in annual earnings, currently stands at 38.0x. In comparison, the tech-heavy Nasdaq’s P/E ratio fluctuates near 26.8x.

Fresh highs in sight?

Nvidia has been the best performing constituent of the S&P 500 in 2024, albeit experiencing a pullback from its all-time high in June. In the short term, the stock has been on the rise again, with traders locking their gaze on the upcoming earnings release for fresh clues.

Should earnings surprise to the upside, the stock might face resistance at the July high of $136.15 ahead of the record peak of $140.75.

Alternatively, a huge miss or disappointing guidance could send the price lower towards the June support of $118.00. Further retreats could then cease at $102.00, which is the upper end of the price’s positive gap registered in May.