The market capitalization of semiconductor giant Nvidia (NASDAQ:NVDA) zoomed past that of Amazon on Wednesday, and is closing fast on Alphabet (Apple and Microsoft are already looking nervously in their respective rear view mirrors). So will Nvidia move into third place when it reports earnings on February 21, next week?
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Giving its Magic 8 Ball a good shake, Susquehanna’s Christopher Rolland, a 5-star analyst rated in the top 1% of the Street’s stock pros, confidently declared: “Signs point to yes.”
Not in those exact words, of course. To be precise, what Rolland actually said is that investors have “high expectations” of Nvidia stock, but also that the company is executing at a high level, and will probably deliver a “strong report” next week.
And it had better be right.
At a current P/E ratio of more than 95 times earnings, Nvidia stock has high expectations baked right into its stock price. As Rolland sees it, simply hitting analyst targets for Q4 (fiscal 2024) earnings of $4.56 per share (on $20.4 billion in sales) won’t be enough. Nvidia needs to deliver a clear earnings beat, with sales at least $1.5 billion ahead of expectations, in order to justify the stock’s high price.
So can Nvidia do that?
Perhaps. “Helped by better hyperscale capex guidance and recent commentary from Meta and Tesla suggesting” they’re actively buying GPUs from Nvidia, Rolland sees Nvidia’s data center revenues, which account for 80% of Nvidia’s business, continuing to grow strongly in Q4 and beyond. Future demand looks good, and the supply situation is improving as well, with Nvidia likely to increase production each quarter through the end of this coming year.
Thus, for the time being at least it sounds like Nvidia is able to fully capitalize on red-hot demand for its products by selling all the chips the market can consume, even as it raises prices on what it sells. This bodes well for gross profit margins – although perhaps not as well as investors will be hoping. Nvidia is already earning gross margins of 74%, getting much better than 75% seems unlikely, and when you get down to it, the scale only goes up to “100%” (although if anyone can earn gross margins of more than 100% these days, it would probably be Nvidia).
Plus, as well as Nvidia’s data center business is performing, and as big a part data center plays in overall revenues, Nvidia’s margins will be dragged down a bit by ongoing weakness in certain other segments, notably automotive (global EV sales are sagging after all).
Ultimately, Rolland is predicting that Nvidia will report quarterly sales of about $21.5 billion next week, which by the analyst’s own logic, could come as a disappointment to investors (being less than $1.5 billion above the consensus forecast). In the short term, this could cause Nvidia shares to fall post-earnings. Longer term, however, the analyst still has a “positive” (i.e. Buy) rating on Nvidia stock, and sets a $850 price target on the shares, predicting 17% upside for the year ahead. (To watch Rolland’s track record, click here)
But what does the broader market sentiment suggest? Despite a Strong Buy consensus rating backed by 34 Buys and 4 Holds, the average price target indicates a range-bound trajectory for Nvidia shares at $703.30. The upcoming earnings report could prompt analysts to recalibrate their targets, potentially resolving this disparity. (See NVDA stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
