NVIDIA Corporation (NVDA) just released its latest results. Nvidia’s second-quarter earnings report beat expectations. Revenue reached $30 billion, up 122% year over year and 15% quarter over quarter. This strong performance resulted in adjusted earnings per share (EPS) of $0.68, beating analysts’ forecasts of $28.6 billion and $0.64, respectively. Yet NVDA stock is down about 7% after the market close. Why?
To answer this question, we need to take a look at NVIDIA Corporation’s outlook for the current quarter. Here is what the company said:
• Revenue is expected to be $32.5 billion, plus or minus 2%.
• GAAP and non-GAAP gross margins are expected to be 74.4% and 75.0%, respectively, plus or minus 50 basis points. For the full year, gross margins are expected to be in the mid-70% range.
Photo by Christian Wiediger on Unsplash
Nvidia’s market cap was $3.1 trillion before today’s earnings report. That means investors expect NVDA to earn around $140 billion per year once it becomes a more mature company like Alphabet Inc (GOOGL), which currently trades at a P/E ratio of 21. However, NVIDIA Corporation’s quarterly revenue and profit were $30 billion and $16.6 billion, respectively. Is it reasonable to assume that NVDA’s quarterly profit of $16.6 billion today can grow to $35 billion in a few years and then continue to grow at the same rate as GOOGL’s quarterly profit?
Investors were surprised that NVDA only forecast a quarterly sales growth rate of 8% for its next quarterly report (compared to 15% last quarter). The decline in the quarterly revenue growth rate is truly concerning, and if the decline continues, it will become awfully clear to investors that NVDA will never reach the $140 billion in annual profits its current stock price demands.
I am the co-founder and head of research at Insider Monkey. We have been recommending a long position in NVDA since May 2023 and the stock has performed well for our subscribers. I also own a small position in NVDA stock myself. However, I believe NVDA’s revenue forecasts have disappointed investors and they are reacting by selling their shares. This is a well-deserved crash and NVDA shares could fall even further when the market opens tomorrow. While I recognize NVDA’s potential as an AI investment, my conviction lies in the belief that some AI stocks are more promising to deliver higher returns and do so within a shorter time frame. If you are looking for an AI stock that is as promising as NVDA but trades at less than 5x earnings, read our report on the cheapest AI stock.
READ MORE: Analyst sees a new $25 billion ‘opportunity’ for NVIDIA and the 10 best stocks to buy in Q3 2024, according to Bank of America.
Disclosure: This article was originally published on Insider Monkey.
