History could repeat itself with Nvidia’s upcoming quarterly update.
Time flies when you’re having fun. And Nvidia (NVDA -0.68%) shareholders are having a lot of fun this year. The stock has soared over 180%. It could very well fly even higher.
Nvidia plans to announce its fiscal year 2025 third-quarter results on Nov. 20, a little over three weeks away. Should you buy Nvidia stock hand over fist before then?
If history is any guide…
Investors might want to think long and hard about buying shares of Nvidia before its Q3 update. The company has an excellent track record of performing better than expectations.
New York University finance professor Aswath Damodaran recently noted that Nvidia has topped Wall Street’s earnings estimates in all but two quarters (both in 2022) over the last five years. If history is any guide, the chances of the company delivering better-than-expected earnings next month are pretty good.
Damodaran provided two potential reasons for Nvidia’s impressive string of beating analysts’ earnings estimates. One possibility is that the company is adept at recognizing revenue and recording expenses so that it can outperform Wall Street’s expectations. Another is that the demand for Nvidia’s graphics processing units (GPUs) is growing so quickly that analysts’ forecasts aren’t keeping up.
I think Damodaran’s second scenario is more compelling. Nvidia might have enough wiggle room with accounting rules to sometimes manage an earnings beat. However, such manipulation wouldn’t realistically enable the company to exceed expectations consistently for nearly every quarter over five years.
But there’s an even better argument for the NYU professor’s second potential reason for Nvidia’s outperformance. The demand for Nvidia’s GPUs unequivocally has accelerated more quickly than Wall Street projected in the past because analysts have said so themselves.
Will history repeat itself?
Should investors expect Nvidia to do it again? Based on management’s comments in recent months, there are some reasons to be optimistic.
Nvidia CFO Colette Kress said in the company’s Q2 earnings call that the demand for Hopper GPUs “will continue to grow into the second half” of the year. She also noted later that Nvidia believes its adjusted gross margin will be around the same level in Q3 as reported in Q2.
The consensus estimates among the 37 analysts surveyed by LSEG are for Q3 revenue of $32.9 billion and adjusted earnings of $0.74 per share. Those numbers reflect sequential growth of roughly 9.7% and 8.8%, respectively.
In Q2, Nvidia’s revenue jumped 15% from the previous quarter with adjusted earnings per share increasing 11%. The company’s growth could slow somewhat in Q3 and still be enough for Nvidia to top Wall Street’s estimates. For what it’s worth, though, Nvidia projects Q3 revenue of $32.5 billion, which is lower than analysts expect. Of course, the company has been known to sandbag with its guidance.
Two things to keep in mind
So does it make sense to buy Nvidia stock hand over fist before Nov. 20? Maybe. However, I think investors should keep two things in mind.
First, earnings beats don’t necessarily translate to significant stock gains. Nvidia exceeded analysts’ estimates with its Q2 results in August only for its share price to immediately sink and continue falling for several more days.
Second (and more importantly), whether you buy Nvidia stock before or after the company’s Q3 update probably won’t make much of a difference in your returns over the long run. If you’re a long-term investor and believe the shift to accelerated computing and artificial intelligence (AI) are unstoppable trends, any time is arguably a good time to buy Nvidia.
On that note, I’d be remiss without pointing out that the big story in Nvidia’s next quarterly update could be more information about customers’ excitement over the new Blackwell chips. Nvidia CEO Jensen Huang has already said the demand for Blackwell is “insane.” Perhaps the biggest way the company could beat expectations in its Q3 update will be with its outlook related to the new GPU platform. We’ll find out soon.
Keith Speights has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.