Stock Market

It’s safe to say that Nvidia (NASDAQ:NVDA) really crushed it with its latest earnings release. That’s the immediate takeaway, following the nearly 25% post-earnings spike in the price of NVDA stock.

The chip maker knocked it out of the park with both results and guidance (more below) because of its high AI exposure. This may seem to many as if the market has overreacted to news that was arguably already baked into NVDA’s share price.

While it’s possible shares pull back a little, that’s not to say that a big reversal is in store for this popular tech stock. It could take some time for shares to rally by nearly another 25% again.

However, taking a closer look at the situation, there may be a path for the stock to continue climbing in the near-term. Here’s why.

Why NVDA Stock Popped After Earnings

Post-market on May 24, Nvidia released its financial results for the preceding fiscal quarter (ending April 30, 2023). For the quarter, revenue came in at $7.19 billion. While this represented a 13% decline compared to the prior year’s quarter, this figure handily beat analyst expectations.

The same thing played out with Nvidia’s earnings for the quarter. These came in at $1.09 per share, down 20% year-over-year, but well above sell-side forecasts calling for quarterly earnings of 92 cents per share.

However, it wasn’t so much these current results that sparked the aforementioned post-earnings pop for NVDA stock.

Rather, it was the company’s guidance for the coming quarter that sparked this turbo-charged rally.

According to CEO Jensen Huang, there is surging demand from accelerated computing and generative AI end users for its data center chips. Because of this, the company expects to report $11 billion in sales this quarter.

For reference, pre-earnings analysts were expecting Nvidia to report revenue of just $7.2 billion this quarter. With this promising outlook giving credence to the argument that high demand for AI chips will far outweigh sector-wide demand headwinds, it’s no wonder shares bolted higher on this news.

Two Reasons This Rally Could Continue

Following the market’s decision to “buy on the rumor, buy more on the news” with NVDA stock, shares have not only recovered from their tech sell-off losses. NVDA has now yet a new all-time high. After this move to prices topping $380 per share, some investors may decide to take some profit.

This could result in some slight declines in the immediate term, as mentioned above. Still, Nvidia could easily hold steady at or near current price level, as the narrative of AI-fueled growth stays intact.

Following a brief period of treading water, there are two factors that could help NVDA continue to rally, albeit at a more gradual pace.

First, more news about AI-related demand growth could up  expectations/forecasts for this year’s earnings. Similarly with any news about the recovery of demand for its non-AI chip offerings (chips for gaming and PCs). These factors could keep shares moving higher ahead of earnings.

Second, the next quarterly earnings release/guidance update, expected to drop in late August. If these results beat expectations, another round of “buy on the rumor, buy more on the news” may be in store.

Bottom Line

It’s very possible current trends to continue with NVDA. Still, keep in mind that the story could always change. For instance, it’s possible that while AI chip demand is off the charts today, as big tech races to stake its claim in this new tech gold rush, this demand could always taper off unexpectedly.

NVDA’s rich valuation of around 49 times forward estimated earnings is only sustainable, if the company’s results/guidance updates keep beating expectations.

If demand cools, and analyst forecasts calling for earnings topping $10 per share next fiscal year, and topping $15 per share the fiscal year after that are revised downward, sentiment could shift in a big, bad way.

Nevertheless, if you can stomach the uncertainty surrounding the AI boom, feel free to maintain/begin building a position in NVDA stock.

NVDA stock earns a B rating in Portfolio Grader.

On the date of publication, Louis Navellier had a long position in NVDA. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article.

The InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.

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