Nvidia could help pull the stock market out of its recent slump.
Nvidia (NVDA 4.05%) is a $2.6 trillion company, and it currently represents 5.8% of the value of the S&P 500 index. In June, Nvidia stock was sitting on a 150% year-to-date gain, which was responsible for one-third of the entire return in the S&P 500.
Both Nvidia and the index have been in a slump since mid-July, but there is a seismic event coming up on Aug. 28 that could reverse both of their fortunes. It's the date Nvidia reports its financial results for the fiscal 2025 second quarter (ended July 31), and if past quarters are any indication, it could be an absolute blowout.
Nvidia designs the most powerful data center chips for processing artificial intelligence (AI) workloads, and demand from some of the world's largest tech giants continues to outstrip supply. Therefore, investors are waiting on the edge of their seats for the company's latest sales results; here's how I predict Nvidia stock will react after they hit the wires.
Image source: Nvidia.
Nvidia dominates the market for AI data center chips
Nvidia's graphics processors (GPUs) for data centers set the benchmark for AI development. GPUs are designed for parallel processing, which means they can complete multiple tasks simultaneously. They can handle high throughput and typically have a significant amount of built-in memory, which makes them ideal for processing large volumes of data. That is key when it comes to training AI models and performing AI inference.
AI applications could drive a productivity boom across the global economy worth trillions of dollars in the coming decade, according to many Wall Street forecasts. As a result, data center operators are replacing much of their traditional CPU-based infrastructure with GPUs to meet demand from AI developers. Nvidia's flagship H100 GPU has been the go-to choice since last year, but the company is racing to beat its own benchmarks when it comes to performance.
Nvidia's new H200 can perform AI inference at almost twice the speed of the H100 while consuming half the amount of energy. Then there is the GB200, which is based on Nvidia's new Blackwell architecture, and it could perform AI inference at a whopping 5 times the pace of the H100. Blackwell-based chips will start shipping to customers at scale in 2025.
Nvidia has a tight grip on the data center GPU market. It had an estimated 98% market share in 2023, and even though that will shrink this year as viable competition comes online from other chipmakers like Advanced Micro Devices, demand is likely to continue outstripping supply.
Here's what Wall Street expects from Nvidia's upcoming quarterly report
Nvidia generated a record $26 billion in revenue during the fiscal 2025 first quarter (ended April 28), which was a 262% increase from the year-ago period. It blew Wall Street's $24.6 billion projection right out of the water. The result included $22.6 billion in data center revenue alone, which represented 427% growth on the back of surging GPU demand.
Nvidia also delivered an incredible result at the bottom line, with $6.12 in earnings per share. It was a 461% increase and it came in comfortably above the Street's $5.59 prediction.
Wall Street also underestimated Nvidia's guidance. The company told investors it expects to show $28 billion in second-quarter revenue when it reports on Aug. 28, whereas the Street pegged that number at $26.6 billion.
Analysts have since played catch-up, and their consensus estimate has been revised higher to $28.5 billion, which signals Nvidia's own forecast might even be too conservative. We'll know for sure in two weeks.
Nvidia stock could soar with the help of its Q2 results
While the performance of a stock on any given day is mostly just noise, here's how Nvidia reacted to each of its last two earnings reports:
- Nvidia reported its results for the fiscal 2024 fourth quarter after the bell on Feb. 21, and its stock soared 16.4% the following day.
- Nvidia reported its results for the fiscal 2025 first quarter after the bell on May 22, and its stock closed 9.3% higher the following day.
But the longer-term trend is crystal clear. Nvidia was a $360 billion company at the beginning of 2023, right before AI fever swept Wall Street, and its stock has surged more than 700% since then. In other words, a string of incredible earnings reports has created sustained upward momentum in its stock price, and I think Q2 will contribute to that trend.
If Nvidia exceeds Wall Street's sales estimate, its stock could jump by at least 9% the following day, as it did after its Q1 results. The response could be even more positive given the recent dip in the stock. However, investors should be more focused on the longer term.
If Nvidia manages to deliver $3.75 in earnings per share in fiscal 2026 (which starts in February 2025) as Wall Street expects, its stock would have to soar by 108% over the next 18 months just to maintain its current price-to-earnings (P/E) ratio of 58.2.
Granted, that P/E ratio is quite expensive relative to the Nasdaq-100, which trades at a P/E ratio of 29.6, but it might be temporarily justifiable given Nvidia's lightning-paced growth.
I say "temporarily" because this dream run will come to an end, eventually. Competition is growing in the market for AI data center chips, and as is the case with every technology, the further development of AI past a certain point will yield diminishing returns, which will shrink demand. It's difficult to predict exactly when that will happen, but investors should be wary of holding the stock blindly in the hope of earning the same returns Nvidia delivered in the past.
Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.
