NVIDIA Corporation (NVDA) just reported its latest earnings results. Nvidia’s second-quarter earnings report exceeded expectations, with revenue reaching $30 billion, up 122% year-over-year and 15% quarter-over-quarter. This strong performance translated into adjusted earnings per share (EPS) of $0.68, surpassing analysts’ forecasts of $28.6 billion and $0.64, respectively. Yet, NVDA stock is down around 7% after hours. Why?
To answer this question, we have 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 before today’s earnings report was $3.1 trillion. This means investors expect NVDA to earn around $140 billion per year once it becomes a more mature company like Alphabet Inc (GOOGL) which is currently trading at a forward P/E multiple of 21. NVIDIA Corporation’s quarterly revenue and profit were $30 billion and $16.6 billion respectively though. Is it reasonable to assume that NVDA’s quarterly profit can go from $16.6 billion today to $35 billion in a few years and then continue to grow at the same rate that GOOGL’s quarterly profit is growing?
Investors were surprised to see that NVDA projected only an 8% quarterly revenue growth rate for its next quarterly report (vs. 15% for the last quarter). The decline in quarterly revenue growth rate is really concerning and if the decline continues, it will be awfully clear to investors that NVDA will never get to the $140 billion annual profit figure that its current stock price is demanding.
I am Insider Monkey’s co-founder and its research director. We have been recommending a long position in NVDA since May of 2023 and the stock’s performance has been good to our subscribers. I also personally own a small position in NVDA shares. However, I believe that NVDA’s revenue projections have disappointed investors and they are responding by selling their shares. This is a well-deserved crash and NVDA shares might decline even more tomorrow when the markets open. While I acknowledge the potential of NVDA as an AI investment, my conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as NVDA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: This article was originally published at Insider Monkey.