Leading analyst Christopher Rowland sets expectations for Nvidia stock ahead of earnings

The market capitalization of the semiconductor giant Nvidia (Nasdaq: NVDA) It overtook Amazon on Wednesday, and is quickly closing in on Alphabet (Apple and Microsoft are already looking nervously in each other's rearview mirrors). Will Nvidia move into third place when it reports its February 21 earnings next week?

After a good shake of the Magic 8 Ball, Susquehanna's Christopher Rowland, a 5-star analyst ranked in the top 1% of equity professionals on the Street, declared confidently: “Signs point to yes.”

Not in those exact words, of course. To be precise, what Rowland actually said is that investors have “high expectations” for Nvidia shares, but also that the company is carrying out its operations at a high level, and will likely deliver a “strong report” next week.

And he better be right.

At a current P/E ratio of more than 95 times earnings, Nvidia stock has high expectations that are directly reflected in its stock price. As Rowland sees it, simply meeting analysts' targets for Q4 (fiscal 2024) earnings of $4.56 per share (on sales of $20.4 billion) will not be enough. Nvidia needs to deliver clear profits, with sales of at least $1.5 billion ahead of expectations, in order to justify a higher stock price.

Can Nvidia do this?

maybe. “Aided by better hyperscale capex guidance and recent comments from Meta and Tesla that they are actively purchasing GPUs from Nvidia, Rowland sees Nvidia's data center revenue, which represents 80% of Nvidia's business, continuing to grow strongly in the fourth quarter and beyond.” Future demand looks good, the supply situation is also improving, and Nvidia will likely increase production every quarter until the end of next year.

Thus, for now at least, Nvidia appears to be able to take full advantage of the intense demand for its products by selling all the chips the market can consume, even while raising prices on what it sells. This bodes well for gross margins – although perhaps not as high as investors were hoping for. Nvidia is already achieving gross margins of 74%, seems unlikely to get much better than 75%, and when you dig deeper, the scale only goes up to “100%” (although if anyone can earn gross margins of more than… 100%) These days, it's probably Nvidia).

Additionally, in addition to the performance of Nvidia's data center business, and with the large role data center plays in overall revenue, Nvidia's margins will decline slightly due to continued weakness in some other sectors, particularly automotive (global electric vehicle sales are declining after all). ).

Ultimately, Rowland expects Nvidia to report quarterly sales of about $21.5 billion next week, which could come as a disappointment to investors (less than $1.5 billion above consensus expectations). In the short term, this could cause Nvidia shares to decline after earnings. However, in the longer term, the analyst still has a “positive” (i.e. buy) rating on Nvidia stock, sets a price target for the shares of $850, and expects a 17% upside for next year. (To watch Roland's record, click here)

But what does broader market sentiment suggest? Despite a Strong Buy consensus rating supported by 34 Buys and 4 Holds, the average price target indicates a range-bound path for Nvidia shares at $703.30. The upcoming earnings report may prompt analysts to recalibrate their targets, which could resolve this disparity. (See NVDA stock forecast)

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.