Should you buy Nvidia stock before the AI ​​chipmaker reports earnings on May 22?

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Shares of Nvidia rose after its fourth-quarter report, and investors are hoping for an encore on May 22.

The launch of creative artificial intelligence (AI) application ChatGPT sent Wall Street into a frenzy in late 2022. Nvidia (NVDA -1.84%) Already been a big winner.

Nvidia was the best performing stock. S&P 500 Last year, mainly because interest in AI fueled unprecedented demand for its graphics processing units (GPUs). Shares are now up 510% since the start of 2023, but a potential inflection point is on the horizon.

Nvidia will announce first-quarter financial results after the market closes on Wednesday, May 22 at 5 p.m. ET. For context, the stock jumped 16 percent after its underwhelming fourth-quarter financial report, and shareholders are no doubt hoping for an encore performance. However, Wall Street analysts have particularly high expectations this time around.

Should you buy Nvidia stock before May 22?

Nvidia impressed Wall Street with triple-digit growth in the fourth quarter.

Nvidia crushed expectations with its fourth quarter financial report. Revenue in the data center product category grew 265 percent to $22.1 billion on a particularly strong pace, driven by demand for artificial intelligence systems and software. And non-GAAP net income rose 491% to $12.8 billion.

The chart below shows Nvidia's fourth-quarter revenue growth across its four core product categories.

The chart above shows Nvidia's fourth-quarter revenue growth (year-over-year) across its four primary product categories. The fiscal fourth quarter ended on January 28, 2024.

On the earnings call, CEO Jensen Huang attributed the strong fourth-quarter results to two platform shifts. Data centers are moving from general-purpose to high-speed computing and evolving into creative AI factories that turn large amounts of raw data into digital intelligence. “Nvidia AI supercomputers are essentially the AI ​​generation factories of this industrial revolution,” Huang told analysts.

Looking back, Nvidia has now achieved three consecutive quarters of triple-digit revenue and non-GAAP net income growth, as shown in the chart below.

The chart above shows Nvidia's revenue and non-GAAP net income growth (year-over-year) over the past five quarters.

Wall Street expects an exceptional first quarter report from Nvidia.

In the first quarter, Nvidia's revenue is expected to grow 234% to $24 billion. Management also provided guidance for its non-GAAP gross margin, operating margin, and tax rate, as non-GAAP net income is forecast to increase approximately 416% to $5.62 per diluted share.

By comparison, the Wall Street consensus calls for first-quarter revenue to increase 240% to $24.5 billion, and non-GAAP net income to increase 409% to $5.55 per diluted share. Analysts also expect second-quarter revenue to jump 96% to $26.5 billion, with non-GAAP net income up 119% to $5.91.

Nvidia reported better-than-expected results in each of the last four quarters, and the company also provided guidance that significantly exceeded Wall Street's consensus in the fourth quarter. Anything less this time could send the stock plunging. Alternatively, shares could rise if Nvidia beats expectations and guidance beyond consensus.

Nvidia has a strong presence in many parts of the AI ​​economy.

The bull case for Nvidia builds on its unique position in the AI ​​economy. Its graphics processing units (GPUs) are the gold standard in accelerating complex data center workloads such as AI applications. According to analysts, Nvidia holds between 80% and 95% market share in AI chips. But the company is also gaining ground in other product categories.

For example, Nvidia recently introduced the data center central processing unit (CPU). In the third quarter, CEO Jensen Huang told analysts, “We're on a very fast ramp with our first data center CPU with a multibillion-dollar product line.” Additionally, high-performance networking equipment has become a $10 billion business for Nvidia, and its nascent software and services offering achieved an annual revenue run rate of $1 billion in the fourth quarter.

In short, Nvidia is a one-stop shop for artificial intelligence, and Goldman Sachs Analyst Toshiya Hari sees this as a key difference. As he wrote in a recent note to clients:

We believe Nvidia will remain the de facto industry standard for the foreseeable future given its competitive advantage spanning hardware and software capabilities. Nvidia's annual introduction of new products and platforms sets the pace for innovation that keeps it at the forefront of the industry.

Nvidia stock looks expensive, so investors should be cautious.

The graphics processor market is projected to grow by 28 percent annually through 2030, and AI spending on hardware, software, and services is predicted to grow by 37 percent annually over the same period. This gives Nvidia a good shot at annual revenue growth of around 30% by the end of the decade.

Wall Street expects the company to grow earnings per share by 35% annually over the next three to five years. In this context, the stock's current valuation at 74 times earnings looks expensive.

Personally, I would wait for a cheaper multiple, but investors looking to buy the stock today should start with a very small position. Expectations surrounding first-quarter earnings are sky-high, so there's a very real possibility that shares will drop after this report.

If that happens, patient investors should consider buying a large position in Nvidia at this time. If it doesn't, many other companies are well-positioned to benefit from the AI ​​boom.

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