Nvidia Poised for Strong Q2 Earnings Amid AI Boom and Hyperscaler Investments

Nvidia (NVDA) is gearing up to release its second-quarter earnings report on August 28, anticipating that the company will again exceed its financial guidance and project even higher revenue for the upcoming quarter in October. Despite the positive outlook, Nvidia continues to face supply constraints, limiting its revenue potential due to production bottlenecks among its key manufacturers and partners.

A key metric to watch in Nvidia’s earnings report is the growth in AI GPU demand, which is closely tied to capital expenditures by major hyperscalers. Encouraging signs emerged in late July, with Microsoft (MSFT) announcing plans to increase its capex over the next year, and Meta Platforms (META) raising its guidance from $37.5 billion to $38.5 billion. Additionally, Amazon (AMZN) anticipates a significant rise in AI-related spending in the coming year.

Both Alphabet (GOOGL) and Meta have acknowledged that underinvesting in AI could be far riskier than overinvesting, which bodes well for Nvidia in the near term. However, this aggressive spending also raises concerns that there could eventually be a pullback in AI investments once companies feel they have sufficient AI GPU supply.

Meanwhile, Advanced Micro Devices (AMD) has increased its AI GPU forecast for 2024, though it remains far below Nvidia’s level of sales. Nonetheless, this is seen as a positive indicator, as it suggests continued strong demand for Nvidia’s GPUs, even if customers are turning to AMD due to availability issues.

Investors are now increasingly focused on AI-related revenue, questioning whether companies can generate sufficient returns to justify their current levels of AI spending. However, a significant portion of AI investment remains in research and development by startups, enterprises, and “moonshot” projects like robotics, genetics, and autonomous driving, which are less likely to have immediate AI revenue streams. Although these investments may not produce short-term gains, they could still prove to be essential for long-term growth.

In the best-case scenario, firms investing in AI could see substantial revenue increases. But even if certain companies don’t generate large amounts of AI revenue, their investments may protect them from competition, while those that fail to invest risk becoming obsolete. In such cases, heavy AI capex and R&D spending are seen as worthwhile, even if the payoff is more implicit than explicit.

Nvidia’s Fair Value Estimate

Nvidia currently holds a 3-star rating, with its stock considered fairly valued based on a long-term fair value estimate of $105 per share. This suggests an equity value of approximately $2.5 trillion, with a fiscal 2025 price-to-earnings ratio of 37 times and a forward price-to-earnings ratio of 27 times for fiscal 2026.

Nvidia’s future stock performance will largely depend on its success in the data center (DC) and AI GPU markets. The company’s DC business has already experienced rapid growth, expanding from $3 billion in fiscal 2020 to $15 billion in fiscal 2023, and more than tripling to $47.5 billion in fiscal 2024. Despite ongoing supply constraints, Nvidia is expected to continue increasing its revenue through fiscal 2025 as more supply becomes available.

Looking ahead, Nvidia is projected to see a 133% increase in DC revenue in fiscal 2025, reaching $111 billion. Over the next three years, the company is expected to achieve a 23% compound annual growth rate, fueled by continued investments in data centers by leading enterprise and cloud computing customers. Although Nvidia may experience a temporary slowdown in AI demand or an inventory correction in the medium term, the company’s average annual DC growth rate is expected to stabilize at 10% as AI technology matures.

This combination of exponential growth and strategic investment positions Nvidia to remain a dominant force in the AI and data center markets, with strong potential for sustained revenue growth in the years ahead.