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I hate to admit this one, really.
But the setup on Nvidia's (NVDA) stock into earnings on Wednesday evening has me confused.
Granted, I left the sell-side analyst gig over 10 years ago and no longer recommend stocks. But it's hard to shake old habits, and for me, that's trying to figure out how a stock will react in the 24 hours after an earnings report hits the wires.
For this Nvidia report, I'm stumped on which way the market might go — though I have concerns that investors may sell on the news.
Nvidia's gross profit margins are compressing as Blackwell chips have entered the mix. The Street is anxiously awaiting management's confidence in a gross margin recovery back to when it targeted mid-70% levels in the second half of the year. Given the headwinds in the economy, I'm just not sure Nvidia gives that type of confident guidance. If anything, it could say gross margins will ramp above 70% in the second half of the year — but that risks letting investors down. Almost a lose-lose scenario.
Second quarter sales and earnings guidance could surprise the optimistic Street as management aims to reflect the impact of the ban on H20 chips to China. While analysts have seen this coming — EPS estimates have been lowered over the past 60 days, according to Yahoo Finance data — they may be underestimating the top-line headwind.
"The stock will look for a positive catalyst (2026 visibility, gross margin recovery, new China product) to appreciate near-term, in our opinion," said BofA semiconductor analyst Vivek Arya in a note.
Nvidia's valuation from a price-to-earnings multiple perspective is also thought-provoking. On the one hand, given the company's long-term growth potential, it looks relatively cheap. Considering the factors I mentioned above, however, the valuation could also be considered expensive.
Below is some further context on Nvidia's stock ahead of earnings from those I know in the trenches. I asked this trio for their views on Nvidia's PE ratio.
Keen on snagging more insight? Drop me a line on X @BrianSozzi with all Nvidia questions today and into the lead-up to earnings this coming week. I will do my very best to answer all of them!
I will also note that Yahoo Finance will have special coverage of Nvidia's earnings week beginning Monday morning. So be sure to check in frequently to get your analytical dose of Nvidia live on Yahoo Finance, on demand, or in digital text form.
"In terms of Nvidia (and even Palantir), I would argue that because of the multi-year prospects (data center, AI infrastructure growth for Nvidia) and AI adoption in the various markets, that a simple P/E ratio is the not the best (right?) way to look at those stocks or even ones like ServiceNow. A PEG [price-to-earnings growth] ratio analysis better captures that multi-year opportunity (which of course we can't simply take on faith but need to corroborate and update as we move through quarters/years)."
"I think it [the relatively low PE on Nvidia] just speaks to the skepticism the market has towards Nvidia’s ability to keep up these monster beat revenue quarters. They believe Palantir's best quarters are ahead of it in terms of upside growth and they believe that Nvidia's best quarters are where we are right now and that this is as good as it gets.
"The market isn't necessarily right, and it's been like this for over a year now which is why Nvidia's stock price has treaded water. I've thought Jensen [Huang] would surprise the market with another wave of growth but it hasn’t happened yet.
"Nvidia's earnings haven't led to a ripping of the stock price for over a year now. They've been just meeting expectations. However, I think they can start to show some surprise to the upside with interest in Blackwell that could bump the stock back to the $140-150 levels afterwards. Beyond that? They would really have to shock people, and I don't think we're there yet. That next big wave of growth might take another 6 months to show up."
"Nvidia's profits and sales are growing at an astounding rate. If you believe the growth rates will continue, then yes, you probably also think the stock is cheap. Nvidia's share price has rallied 42% from a year ago, yet the price-earnings and price-sales ratios have stayed the same. That's incredible. It's also comparably cheap. Nvidia has become one of the most well-known stocks in the world, and it's attracted money from all types of investors. Yet it still trades at a respectable P/E when you compare it to other tech stocks/semiconductor companies. It's also one of a handful of firms that has proven it can make money off of AI. That's a powerful advantage in today's AI-obsessed market.
"Also, value is in the eye of the beholder. Think of value like a designer shirt at your favorite boutique. Not everybody will pay $50 for a shirt that cost a dollar to make. Some will because they're a fan of the brand, but others will scoff at paying a premium for a basic white tee. Nvidia could have the 'cheap' label just because it benefits from its brand. That, plus it’s the 'cheapest' stock in the Magnificent Seven purely by stock price. For most people, value is how much something will cost them. Nvidia at $130 is 'cheaper' than Meta (META) at $640 or Microsoft (MSFT) at $455."
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