Demand for artificial intelligence infrastructure has been an enormous tailwind for semiconductor company Nvidia (NASDAQ: NVDA). Its revenue and earnings have increased at a triple-digit pace in the last five quarters, and its share price has surged 910% since January 2023.
Nvidia will announce financial results for the third quarter after the market closes on Wednesday, Nov. 20. The stock has been exceptionally volatile following recent earnings events, which presents investors with a difficult choice: Is it smart to buy shares now?
For what it's worth, Wall Street is overwhelmingly bullish. Among the 65% of analysts who follow Nvidia, 92% rate the stock a buy and the other 8% rate it a hold ahead of the company's third-quarter earnings report. Not a single analyst recommends selling Nvidia at the present time.
Here's what investors should know.
Nvidia has a durable competitive advantage in vertical integration
Nvidia specializes in accelerated computing. The company is known for its graphics processing units (GPUs), chips that are the industry standard in speeding up computationally intensive data center workloads, like artificial intelligence (AI). But Nvidia is truly formidable because it provides vertically integrated compute solutions that span hardware, software, and services.
To elaborate, Nvidia has created a rich ecosystem of software development tools called CUDA. The platform includes over 300 code libraries and 600 pretrained models that let programmers write GPU-accelerated applications across use cases, from robotics to scientific simulation. The company also builds adjacent data center hardware, including central processing units (CPUs) and high-speed networking equipment.
Nvidia blends those products into an integrated AI service called DGX Cloud, which lets businesses provision through the internet the supercomputing infrastructure and software development tools needed to build and manage AI applications. Importantly, while GPUs are still the primary source of revenue, software and services businesses will reach an annual revenue run rate of $2 billion this year, and its networking business already hit an annual run rate of $14 billion.
According to CEO Jensen Huang, Nvidia's vertically integrated approach to accelerated computing lets it build systems with a superior total cost of ownership. In other words, Nvidia GPUs are not only the fastest AI chips on the market but also the cheapest when accounting for direct and indirect costs. That affords the company a durable competitive moat.
Image source: Getty Images.
What Wall Street expects when Nvidia reports third-quarter results
Nvidia beat estimates in the second quarter of fiscal 2025, which ended in July 2024. Revenue increased 122% to $30 billion, and non-GAAP (non-generally accepted accounting principles) earnings increased 152% to $0.68 per diluted share. That marked the fifth straight quarter in which the company reported double-digit growth on the top and bottom lines.
That trend will likely end in the third quarter. Management gave guidance that implies revenue and non-GAAP earnings will increase by 80%, though Wall Street has set the bar a little higher. Analysts expect Nvidia's revenue to increase 81% to $32.9 billion and non-GAAP earnings to increase 85% to $0.74 per diluted share.
Importantly, even if Nvidia tops those figures on Nov. 20, there is no guarantee the stock will move higher on the news. Consider what happened last time. Nvidia beat estimates in the second quarter and gave stronger guidance than Wall Street anticipated, yet the stock tumbled about 8% following the announcement.
Investors are no longer satisfied with a modest earnings beat but rather expect Nvidia to crush estimates. That attitude led to significant post-earnings volatility in the last three quarters, such that Nvidia's stock price moved by an average of 10.7 percentage points after the company announced its results. Shareholders should be prepared for similar volatility this time around.
Nvidia stock trades at a reasonable price compared to Wall Street's earnings estimates
Susquehanna analyst Christopher Rolland recently wrote, "Nvidia has become the world's de facto enabler of AI." And the company is likely to retain its leadership position for the foreseeable future. Even if a competitor builds a faster AI chip, they will still find it difficult to dethrone Nvidia without a robust ecosystem of software development tools. Nvidia has a significant head start there. It has regularly added new tools to its CUDA platform for nearly two decades.
Looking ahead, Wall Street expects Nvidia's adjusted earnings to grow by 50% annually through fiscal 2026, which ends in January 2026. That consensus estimate makes the current valuation of 66.5 times adjusted earnings look reasonable.
Personally, I think Nvidia is a must-own stock, given that it participates in so many areas of the AI economy. And like most Wall Street analysts, I think patient investors should consider buying a small position today. If the stock pulls back after the company reports earnings, investors should consider building a slightly larger position at that time.
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Trevor Jennewine has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
