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Nvidia Q1 Preview: Another EPS Beat in Store?

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Earnings season isn’t quite over just yet, although most companies have already unveiled their highly sought-after Q1 results. It’s been an interesting earnings season so far, to say the least.

Investors have taken hit after hit, with a few ultra-popular stocks such as Netflix (NFLX - Free Report) and Amazon (AMZN - Free Report) tanking double-digit percentages following their quarterly releases.

To put it simply, it’s been a battlefield out there, and sellers keep moving forward in the absence of buyers. Nonetheless, the market rolls on, and investors must try their best to remain focused on the long-term picture.  

On deck to report quarterly results after the bell rings on Wednesday is a company that has generated investors a multitude of gains throughout the last several years, Nvidia (NVDA - Free Report) .

Credited with being the inventor of the highly successful Graphic Processing Unit (GPU), NVDA is the worldwide leader in visual computing technologies. In addition, the company resides in the Zacks Semiconductor – General Industry, an industry that currently ranks in the top 40% of all Zacks industries.

Share Performance

The five-year share performance of the company is eye-opening. Shares have returned nearly 385% over this timeframe, leaving the S&P 500 in the dust with its return of 83%.

Zacks Investment Research
Image Source: Zacks Investment Research

However, price action throughout 2022 has painted a much different picture, with shares sliding nearly 45% while the S&P 500 has declined roughly 18%. It’s safe to say that this stock has significantly cooled off in 2022, but why?

Zacks Investment Research
Image Source: Zacks Investment Research

Several reasons are to blame for this, but the main driving force behind many sell-offs in high-growth tech stocks has been a hawkish Fed.

The Fed raised interest rates to cool off inflation, limiting companies’ ability to borrow funds at a cheaper rate to fuel future growth. Additionally, with debt becoming more expensive, future cash flows are negatively affected, and the market has been pricing this in.  

Growth Drivers To Watch

The company’s two primary sources of income come from its Gaming and Data Center lines of business. In fact, these two lines of business accounted for nearly 90% of all revenue in its latest Q4 report.

Gaming revenues surged 38% from the year-ago quarter and nearly 7% sequentially to $3.4 billion in the latest quarter.

A booming gaming industry induced by stay-at-home orders from COVID-19 has propelled top-line results in this line of business, and for the upcoming report, analysts forecast quarterly revenue from this segment to grow to $3.43 billion, a 26% increase from the year-ago quarter.

NVDA’s strong lineup of advanced graphics cards has made it a favorable graphics card provider among PC makers, and a significant uptick of new PC gamers and higher spending on gaming GPUs have been key catalysts.

Revenues from its Data Center surged 71% year-over-year and 11% from the prior quarter to $3.3 billion in its most recent quarterly report, driven by strong demand for its Ampere architecture products from cloud computing and AI providers. Quarterly revenue estimates for this line of business has NVDA raking in $3.6 billion, a 12% increase from the year-ago quarter.

Additionally, as cloud computing has rapidly gained popularity worldwide and data center demand has increased, NVDA has been experiencing a much higher level of demand for its GPUs – this trend is expected to continue as companies rapidly migrate to cloud computing and, in turn, further support the top line.

Below is a chart that illustrates forecasted annual EPS and revenue.

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Image Source: Zacks Investment Research

Quarterly Results & Estimates

EPS beats have been the norm for NVDA, as it has chained together 13 consecutive quarterly EPS beats dating back to October of 2018. Over its last four quarters, the company has an average EPS surprise of 7%, and in its latest quarter, NVDA beat estimates by a notable 8%.

The Consensus Estimate Trend has inched up marginally over the last 60 days, reflecting quarterly earnings of $1.30 per share – a robust 42% increase in earnings from the year-ago quarter.

NVDA regularly beats bottom-line estimates as well, with the company chaining together 12 consecutive sales beats dating back to April 2019.

For the quarter, the Zacks Consensus Sales Estimate has NVDA pegged to rake in $8.2 billion in revenue, a substantial 43% expansion in the top line from year-ago sales of $5.7 billion.

Overall, top and bottom-line quarterly estimates heading into Wednesday reflect strong year-over-year growth rates and should give NVDA investors confidence moving forward.

Advanced Micro Devices

Seen as Nvidia’s top rival by many, Advanced Micro Devices (AMD - Free Report) is another widely popular name in the semiconductor arena. Comparing the two companies’ recent earnings and share performances allows us to see how other semiconductor names have held up.

Year-to-date, AMD shares are down a nasty 35%, although the share performance displays that AMD shares have shown a higher blend of valuable defense.

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Image Source: Zacks Investment Research

Additionally, the company has an average EPS surprise over its last four quarters at 19%, and in its latest quarter, AMD beat estimates by a considerable 24%.

Earnings for the current fiscal year are forecasted to grow 55%, and over the next three to five years, the bottom line is forecasted to expand by nearly 33%. Similar to NVDA, AMD shares have declined dramatically, although growth rates have remained strong for both companies.

Advanced Micro Devices is a Zacks Rank #3 (Hold) with an overall VGM Score of a B.

Bottom Line

Quarterly estimates for NVDA display sizable year-over-year growth. Additionally, the company’s forward earnings multiple has retraced down to 35.4X, an absolute fraction of 2020 highs of 93.5X, marking a buying opportunity at levels not seen since pandemic lows in March 2020.

Zacks Investment Research
Image Source: Zacks Investment Research

The company consistently beating on top and bottom-line estimates, increasing demand for its products, and much more reasonable valuation levels give me an optimistic outlook heading into the report. Additionally, Nvidia has an ESP Score of 2.6% heading into Wednesday.

However, the market has shrugged off many strong EPS beats, which could be the same this time. The critical thing to focus on will be top and bottom-line growth rates – not the market’s reaction. If these lines of business display continued strength, the future is bright for NVDA shares.

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