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Nvidia Earnings Preview: Can NVDA Shares Sustain the AI Rally?

nvidia earnings preview featured image

Nvidia (NASDAQ: NVDA) is a leading semiconductor firm lauded for its cutting-edge graphics processing units (GPU). From gaming to data centres, Nvidia remains at the forefront of pushing existing boundaries by improving its existing innovations. Recently, Nvidia has been making a concerted push towards artificial intelligence (AI) innovation. Consumers and businesses can access generative AI models and advanced cloud services thanks to various breakthroughs. As investors look to the company's upcoming earnings report, Nvidia's skyrocketing stock prices remain a topic of discussion as stakeholders anticipate another possible rally. In this Nvidia earnings preview piece, we’ll explore the drivers of Nvidia’s recent success and whether NVDA shares can keep up their momentum.

What Is Nvidia?

Founded in 1993, Nvidia is an American technology company that specialises in the design and production of GPUs. Its primary markets include gaming, professional visualisation, data centres, original equipment manufacturing and automotive. They are also one of the leading companies in AI development, utilising their GPUs to power machine learning and deep learning algorithms.

Why Is Nvidia So Popular In the Semiconductor Industry?

Before diving into our in-depth Nvidia earnings preview, let's examine why Nvidia has such a lead in the semiconductor industry among various competitors and how they contribute to the company's growth story. A big reason why Nvidia has its legion of fans is because of its technologically superior GPUs. While competitors like AMD also offer GPUs, their offerings often fail to match the performance and efficiency provided by Nvidia GPUs. From energy-efficient GPU architectural designs to unique features like raytracing, Nvidia continually pushes out innovations that help it to maintain that crucial performance advantage. Such willingness to innovate is reiterated through its breakthroughs in AI as Nvidia majorly contributes to developments in machine learning. Ultimately, this willingness to continually innovate is what makes Nvidia the de facto choice when it comes to who businesses and consumers will prefer as Nvidia stays on the forefront of GPU technology.

How Did Nvidia Perform Last Quarter?

Despite fears of a gaming slump impacting the overall profitability of Nvidia, the semiconductor giant managed to establish another strong pillar of revenue generation through its data centres. Based on its recent Q4 earnings report, Nvidia fired on all cylinders by beating earnings per share (EPS) and revenue expectations while raising guidance expectations from US$6.3B to US$6.5B.

Also, one talking point worth mentioning is that Nvidia now earns the majority of its revenue from its data centre market. With revenue amounting to US$3.62B, this accounts for about 60% of its quarterly revenue. While this strong showing helped Nvidia shrug off fears of its slowed growth, it has highlighted the need for Nvidia to diversify its revenue streams so its cash flow stays healthy. Thankfully, Nvidia has AI tech to fall back on thanks to the groundwork that it had already laid in anticipation of AI's explosive growth in interest and development.

For this Nvidia earnings report ending Q1, Wall Street believes Nvidia will report a lower year-on-year EPS of 92 cents on revenue of US$6.52B. This is in response to Nvidia's confidence in its sequential growth, which is expected to be driven by each of its four major market platforms.

Nvidia Earnings Preview: What Investors Should Look Out For

The Q1 earnings for Nvidia could be affected by a variety of key catalysts. Here are some of the most important ones to keep an eye on:

1. An Update on Nvidia's AI Offerings

During its previous earnings report, Nvidia reportedly mentioned AI a grand total of 91 times. While some might poke fun at the excitement behind the future of AI, it's certainly warranted in Nvidia's case as they're seen as the leaders in machine learning and generative AI. During Nvidia's GPU Technology Conference, Nvidia CEO Jenson Huang mentioned that the world is currently at the "iPhone moment for AI" as he believes artificial intelligence will reinvent every industry. Additionally, Nvidia also announced partnerships with Microsoft, Google and Oracle as it intended to bring its AI supercomputers to these companies and aid their cloud computing efforts with the deployment of AI. From automating complex workflows to reducing human error, investors and traders will certainly be expecting an update on the direction Nvidia will be taking with regard to its breakthrough AI technology.

2. Nvidia's Gaming Market Performance

Although the majority of its revenue comes from its data centre market, Nvidia still views gaming as an essential pillar for growth and profitability. While their revenue had shrunk compared to pandemic highs, the gaming segment still grew by 16% quarter-on-quarter in Nvidia's latest earnings report. One of the most significant contributors to this growth was Nvidia's decade-long GeForce Now cloud gaming deal with Microsoft. This partnership significantly improves the value proposition of an active GeForce Now subscription as Xbox and Bethesda games are gradually included on the cloud gaming platform.

Partnerships aside, the gaming market growth was also attributed to the release of Nvidia's mid-tier RTX 4070 Ti GPU that runs on the Ada Lovelace architecture. By increasing the amount of GPU choices for gamers, investors can expect this to translate to increased market share in the GPU space as Nvidia continues to go head-to-head with AMD. For this quarter's Nvidia earnings report, investors and traders will want to keep a close eye on sales numbers for Nvidia's RTX 4070 Ti as a gauge of Nvidia's popularity in the GPU market.

3. High PE Ratio & Valuation

Another factor investors need to consider is Nvidia’s high PE ratio and valuation. Since Nvidia is a leader in its industry, it has established itself as one of the most valuable stocks in the stock market. While bullish investors and traders may welcome the fact that NVDA shares have recently surged past the $300 mark, this placed a giant spotlight on Nvidia's astronomically high valuation. With a price-to-earnings (PE) ratio of 177, Nvidia is well above the industry average of 35.8. In other words, buyers of NVDA shares currently have sky-high expectations for the future earnings growth of Nvidia as they're willing to 177 times the company's earnings per share to own NVDA stock. As such, investors and traders should be cautious when dealing with NVDA shares as any disruption to their future growth trajectory will cause valuations to decline.

4. Political & Macroeconomic Headwinds

The semiconductor industry is facing strong macroeconomic headwinds due to the ongoing tensions between the US and China. After the Biden administration barred US tech companies that receive federal funding from building "advanced technology" facilities in China, the Chinese government responded by banning companies like Micron and flagging them as major security risks. With such tit-for-tat interjections between both world powers, Nvidia is also at risk as it attempts to navigate past the US' stringent hardware export restrictions to tap upon the massive GPU demand in China.

On the macroeconomic side of things, with the global economy slowing down, demand for electronics and components has declined. This would affect revenue streams for both manufacturers and suppliers. As covered in our semiconductor industry outlook for 2023, companies in this sector may need to adjust their production levels to falling semiconductor demand in order to remain profitable. Such macroeconomic headwinds can severely affect semiconductor companies unless they prepare and adapt to mitigate potential losses.

Nvidia Earnings Preview: Technical Analysis

Since finding a bottom during the 2022 semiconductor crash NVDA shares have surged in value thanks to the AI tailwinds. With NVDA shares about 10% off all-time highs, traders are holding their breath as they wonder whether Nvidia will be able to make new all-time highs with this AI rally. Thanks to its recent year-to-date rally, the near-time directional bias is to the upside as NVDA shares attempt to break through the red supply zone marked above. US$319 is the first area of resistance, followed by the stock's all-time high price of US$346.47. Bullish NVDA share traders will be on the lookout for positive earnings news and guidance from management for there to be enough momentum to break through the existing supply zone.

Conversely, bearish traders will be looking out for a possible rejection at the US$319 range, which will trigger a downward trend for NVDA shares. US$290 is the first area of support, followed by US$280. As AI bubble fears and overvaluation worries creep in, Nvidia might not be able to deliver when it comes to delivering its take on the future of AI. This failure to meet expectations might cause NVDA shares to enter a time of correction and head towards the green demand zone marked above.

The Bottom Line

All in all, Nvidia has established itself as the leader in AI and is well-poised to leverage upon this position of strength. From how it plans to revolutionise AI for the world to numerous machine learning upgrades on the enterprise side of things, Nvidia has no shortage of bullish catalysts. However, when it comes to Nvidia's valuation, it's important to remember that Nvidia's current stock price is a reflection of its ability to deliver on the promises it makes. Investors and traders need to keep in mind that the excitement for AI is dictating a lot of the hype that Nvidia is experiencing. Analysts are pointing to potential headwinds that could affect the stock's all-time highs, such as AI bubble fears, overvaluation worries and general market volatility. Ultimately, investors need to decide if Nvidia has what it takes to deliver on its promise so that it can justify its current valuations.

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