Contemplating Purchasing Nvidia Shares Prior to November 20th?
While some investors might view earnings reports as dull events, their interest piques when it comes to companies that significantly impact market trends. Currently, artificial intelligence (AI) is the dominant force in the market, so when the AI frontrunner reports, investors should definitely pay heed.
Nvidia (NVDA 3.08%) is the undisputed lead in AI investments. Its graphics processing units (GPUs) serve as the computational powerhouse behind the majority of advanced AI models in development, and it has benefited immensely from this trend.
Nvidia will release its third-quarter earnings for fiscal 2025 on November 20, making it a significant day for both the market and the stock. However, stocks often experience substantial fluctuations after earnings reports, so investors are eager to know, "Is Nvidia a buy before November 20?"
Revenue growth is a critical factor for Nvidia
Prior to earnings reports, investors receive only a few glimpses into a company's performance each year. But with giants like Nvidia, waiting an entire quarter for updates can feel like an eternity, given the rapid changes in the market.
Fortunately, the difference between the second and third quarters will likely be less pronounced than in previous years.
During the third quarter of fiscal 2024 (October 29, 2023), Nvidia's revenue increased by an astounding 206% year over year. This fiscal year, it is projected to report a 80% increase in revenue. Though that's a significant decrease, a 80% revenue growth is still noteworthy, especially given Nvidia's size.
When a company grows as rapidly as Nvidia, it's more beneficial to focus on quarter-over-quarter revenue growth, as long as the company does not exhibit seasonal fluctuations (revenue fluctuations based on the seasons, such as ski resorts or water parks). Nvidia does not show such fluctuations, and for the third quarter of fiscal 2025, it predicts 8.3% quarter-over-quarter revenue growth. This figure will be worth watching intensely, as a missed target could indicate slowing demand, while a surpassed target would suggest ongoing AI investment.
In my opinion, it's more probable that Nvidia will surpass this target, as we've noticed optimistic comments from other leading tech companies regarding their AI infrastructure expenditures during their conference calls. Though some of this investment will be directed toward proprietary chips developed by these companies, a substantial portion will likely end up in Nvidia's coffers, setting the stage for an impressive quarter in terms of revenue.
However, the profitability aspect could be a different story.
Nvidia must sustain its profit margins to merit its premium valuation
One aspect of Nvidia's success tends to be overshadowed by its remarkable revenue growth: margin expansion. As demand for Nvidia's GPUs soared, its profits increased correspondingly, leading to expanding profit margins compared to the company's historical levels.
Though Nvidia's revenue growth has been commendable, its profit growth has exceeded expectations even more dramatically.
This expansion of both revenue and profit margins occurred due to Nvidia's GPUs demanding high demand, but if you scrutinize the first chart, you'll observe that Nvidia's profit margins began to dip slightly. Although this decline could simply be a minor hiccup, investors must remain vigilant if it manifests as a long-term trend.
Nvidia's stock is already trading at a significant premium, with a trailing earnings multiple of 66 and a forward earnings multiple of 49. To justify this lofty valuation, Nvidia must maintain its profit levels, and ideally, deliver slight improvements. If it manages this, it should help Nvidia weather the earnings report effectively.
So, should you invest in Nvidia stock before it releases earnings? It's a case-by-case situation. If you believe the company will maintain its profit margins and surpass its revenue growth projections, its stock could surge after the earnings report. However, at its current valuation, Nvidia must exceed expectations across the board to post solid gains following the earnings announcement. That's why I will only observe the report, and if an opportunity presents itself, I may take a position (though history demonstrates that patience has not always been a profitable strategy).
Investors should pay close attention to Nvidia's revenue growth and profit margins before making decisions about investing in its stock before the third-quarter earnings release. Given its impressive revenue growth in previous quarters, a surpassing of the projected 8.3% quarter-over-quarter revenue growth could indicate ongoing AI investment and potentially lead to stock price increases. However, Nvidia's premium valuation requires the company to maintain its profit margins or deliver slight improvements to justify the high earnings multiples.
