Nvidia (NASDAQ: NVDA) has been the quintessential artificial intelligence (AI) stock for the past two years. The company’s dominance in the market for the chips that power the data centers used for AI has launched it to unprecedented growth.
The stock has appreciated more than 850% since the beginning of last year and continues marching higher, with its third-quarter earnings report right around the corner.
Start Your Mornings Smarter! Wake up with Breakfast news in your inbox every market day. Sign Up For Free »
Investors who are pondering putting fresh capital into the stock are in a precarious position. I don’t blame anyone for feeling like they’re late to the game, though buying along the way has only proved wise to this point. So, is Nvidia stock a buy heading into earnings? Here is what you need to know.
The broader stock market historically averages an annual return of about 10%, so Nvidia’s outsize move is rare and almost so dramatic that it feels like a bubble just waiting to burst. But AI has created unique circumstances around the business.
Technology companies have fully embraced AI, creating arguably the most significant growth opportunity since the internet’s early days in the late 1990s. Remarkably, a vital component of the AI opportunity (the chips that power it) has consolidated in Nvidia, which owns the lion’s share of the market estimated at between 70% and 95%.
You can see below that its revenue and earnings have increased similarly to the stock price:
So, why does Nvidia keep climbing? Simply put, the stock is still reasonably priced for its anticipated growth. Consensus estimates for revenue continue to climb:
Analysts anticipate Nvidia earning $2.82 per share this year, pricing the stock at 50 times earnings estimates. They also believe earnings will grow by an average of 35.6% annually over the next three to five years. Even today, the valuation is reasonable for its expected growth, with a price/earnings-to-growth ratio (PEG) of 1.4.
Add in the compelling AI story, and Nvidia continues to look attractive, especially compared to stodgy, mature companies with similar earnings multiples but far less growth (I’m looking at you, Costco Wholesale).
This all works as long as Nvidia keeps meeting these high expectations. But the higher it goes, the more the market expects. The company beat Wall Street’s consensus revenue estimate by only 4.5% last quarter, its smallest margin since the AI boom took off.
