The demand for artificial intelligence infrastructure has been a huge support for semiconductor companies Nvidia (NASDAQ: NVDA). Revenue and earnings have grown by triple digits over the past five quarters, and the share price is up 910% since January 2023.
Nvidia will announce its third quarter financial results after the market closes on Wednesday, November 20. The stock has been exceptionally volatile following recent earnings events, leaving investors with a tough choice: is it smart to buy shares now?
For what it’s worth, Wall Street is overwhelmingly bullish. Of the 65% of analysts covering Nvidia, 92% rate the stock as a Buy and the remaining 8% rate it as a Hold, ahead of the company’s third-quarter earnings report. No analyst currently recommends selling Nvidia.
Here’s what investors need to know.
Nvidia has a sustainable 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 accelerating compute-intensive data center workloads, such as artificial intelligence (AI). But Nvidia is truly formidable because it offers vertically integrated computing solutions that span hardware, software and services.
To work this out, Nvidia has created a rich ecosystem of software development tools called CUDA. The platform includes more than 300 code libraries and 600 pre-trained models that allow programmers to write GPU-accelerated applications for various 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 is combining these products into an integrated AI service called DGX Cloud, which allows companies to deliver the supercomputing infrastructure and software development tools needed to build and manage AI applications over the Internet. Importantly, while GPUs are still the main source of revenue, software and services companies will reach annual revenues of $2 billion this year, and their networking businesses will already reach an annual run rate of $14 billion.
According to CEO Jensen Huang, Nvidia’s vertically integrated approach to accelerated computing allows it to build systems with 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 it comes to direct and indirect costs. This gives the company a sustainable competitive position.
Image source: Getty Images.
What Wall Street expects when Nvidia releases third-quarter results
Nvidia exceeded expectations in the second quarter of fiscal 2025 ended July 2024. Revenue rose 122% to $30 billion, and non-GAAP (non-generally accepted accounting principles) profits rose 152% to $0.68 per diluted share. That was the fifth straight quarter in which the company reported double-digit growth on both the top and bottom lines.
This trend will likely end in the third quarter. Management issued guidance implying revenue and non-GAAP earnings will rise 80%, although Wall Street has set the bar slightly higher. Analysts expect Nvidia’s revenue to rise 81% to $32.9 billion and non-GAAP earnings to rise 85% to $0.74 per diluted share.
Importantly, even if Nvidia beats these numbers on November 20, there’s no guarantee the shares will move higher on the news. Think about what happened last time. Nvidia beat expectations in the second quarter and gave stronger guidance than Wall Street expected, but the stock still fell about 8% after the announcement.
Investors are no longer satisfied with a modest profit margin, but rather expect Nvidia to crush estimates. That attitude led to significant post-earnings volatility over the past three quarters, so Nvidia’s stock price moved 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 is trading 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 maintain its leading position for the foreseeable future. Even if a competitor builds a faster AI chip, it will still find it difficult to dethrone Nvidia without a robust ecosystem of software development tools. Nvidia has a significant lead there. It has been regularly adding new tools to its CUDA platform for almost two decades.
Looking ahead, Wall Street expects Nvidia’s adjusted earnings to grow 50% annually through fiscal 2026, which ends in January 2026. That consensus estimate makes the current valuation of 66.5 times adjusted earnings seem reasonable.
Personally, I think Nvidia is a stock to own, 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 Jennevine has positions at Nvidia. The Motley Fool holds positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
