• Nvidia earnings to be released after market close on November 21

• Both earnings and revenue expected to skyrocket

• Stock price trades near all-time high; is there more upside?

The AI darling

Nvidia is by far the best performing stock in both the Nasdaq 100 and S&P 500 indices in 2023, with its price enjoying a massive rally on the back of the Artificial Intelligence (AI) mania. The leading chipmaker’s shares have more than tripled year-to-date, while they are trading just shy of their record high ahead of the Q3 earnings release.

In its two previous earnings reports, Nvidia managed to exceed expectations by a wide margin, sending the broader stock market into overdrive and solidifying that AI is the next big growth lever within the tech sector. Besides strong fundamentals, the firm provided rosy guidance for the upcoming quarters as the demand for advanced GPUs is forecast to keep growing.

Considering that the majority of AI and cloud projects are powered by Nvidia’s advanced chips, the firm’s financial figures are likely to be perceived as a proxy for the health of the tech sector moving forward. This week, the firm reported that its latest GPU H200 will be available in the second quarter of 2024, which is mainly designed to power AI systems as interest in the sector has surged globally.

Risks

Of course, Nvidia is also facing some downside risks and remains under pressure to deliver solid results to justify its outperformance. Firstly, up until now, markets seem to be solely focused on the demand side of the GPU market, neglecting whether Nvidia has the capacity to keep meeting the constantly increasing demand.

If this adverse scenario materialises, many tech giants might quickly turn to Nvidia’s competitors that are waiting around the corner to steal market share. Moreover, to reduce their reliance on Nvidia many big tech companies have already started in-house development of chips, but they are still in embryonic stages.

Finally, the leading chipmaker is also caught in the US-China crossfire as the Biden administration has imposed hard restrictions to prevent Chinese access to advanced semiconductors.

Exceptional fundamentals

Strong financial performance is expected for Nvidia as more and more tech firms that have entered the AI race are in need of its advanced chips to compete in the industry.

The semiconductor designer is expected to post revenue of $16.12 billion for the third quarter of 2023 according to consensus estimates by Refinitiv IBES, which would represent a massive year-on-year growth of 171.8%. Additionally, earnings per share (EPS) are estimated at $3.36, marking a huge 479.3% increase on an annual basis.

Valuation corrects but markets seem unimpressed

Nvidia had worn the crown of the most expensive chipmaker for quite a long time, but things seem to have changed lately. Slightly after its Q1 earnings call, analysts started revising forward earnings expectations higher and higher. Meanwhile, since early July, Nvidia’s stock has been stuck in a consolidation period, which in combination with the increasing forward estimates send its price-to-earnings (P/E) ratio significantly lower.

Despite the latest rally towards its record high, Nvidia’s 12-month forward (P/E) ratio, which denotes the dollar amount someone would need to invest to receive back one dollar in annual earnings, currently stands at 31.4x. In comparison, AMD’s P/E ratio is currently at 32.90x, while the tech-heavy Nasdaq’s fluctuates near 25.4x.

 

Therefore, Nvidia’s performance reflects a paradox as investors were aggressively buying the stock at historically expensive levels, whereas they are unwilling to do so at significantly more attractive ones. Does this suggest a shift in investor expectations or are they waiting for the Q3 earnings report as a confirmation signal to restart buying.

Fresh highs in sight?

Nvidia has been the best performing stock of the S&P 500 in 2023, gaining around 250% before experiencing a downside correction. However, the price has regained traction following its bounce off the five-month bottom of $392.00 in late October, with the bulls pushing the shares back towards the all-time high of $502.66.

Should earnings surprise to the upside, the stock might face resistance at the record high of $502.66 before moving towards uncharted waters.

Alternatively, a huge miss or disappointing guidance could send the price lower towards the October resistance of $476.00, which could serve as support in the future. Even lower, the bears could attack the November low of $392.00.