Shares of Nvidia (NASDAQ: NVDA) have more than doubled since the beginning of the year. Accelerating demand for the company's graphics processing units (GPUs) used for artificial intelligence (AI) training has shown no signs of slowing down.
However, growth stocks can be volatile during earnings season , and Nvidia is one hot tech stock that has a history of wild swings. In fact, the shares have fallen more than 50% from their previous high twice in the last six years. Both sell-offs came amid slowing growth for the company's data center GPUs, highlighting the cyclical nature of the chip industry.
Nvidia is scheduled to announce fiscal second-quarter financial results on Aug. 28. The numbers are expected to be solid based on management's guidance. Let's review the key growth drivers, near-term catalysts, and risks to consider before deciding to buy the stock ahead of the company's next update.
Nvidia's data center business looks solid
Large data centers are in the process of upgrading hardware and other systems for training large language models and generative AI applications like ChatGPT. This drove an incredible 427% year-over-year increase in Nvidia's data center revenue last quarter, and management expects another strong quarter. Guidance calls for Nvidia's total revenue to be approximately $28 billion, representing growth of 107% year over year.
Investors will be looking for another blowout quarter to justify the growth expectations implied by the high price-to-earnings (P/E) ratio. The consensus analyst estimate calls for the company's revenue to come in slightly higher than management's guidance, or $28.49 billion, with earnings per share landing at $0.64. Nvidia's revenue has come in above the consensus estimates over the last year, and investors will be looking for a repeat if the stock is going to move higher in the near term.
NVDA Quarterly Actual Revenue data by YCharts
Of course, Wall Street will be just as interested in management's comments about future demand trends, and on that score, Nvidia has a lot in the pipeline.
Last quarter, it started shipping its new Spectrum-X Ethernet networking solution that is optimized for AI. Nvidia is going up against established companies in the networking market like Broadcom , but management believes this new market will translate to a multibillion-dollar product line within a year.
Nvidia also announced a software offering for its AI Enterprise platform called Nvidia Inference Microservices (NIM), which is designed to help AI developers build and launch new applications much faster.
Most importantly, investors will focus on Nvidia's comments about demand trends for the new Blackwell GPU platform. It takes processing power to a whole new level for AI workloads and is expected to drive strong revenue growth. Early demand for Blackwell is running ahead of supply, which is a great sign for Nvidia's growth prospects looking ahead to next year.
Buy now, or wait?
There have been concerns about rising competition from Broadcom and Nvidia's own customers (cloud services providers) making custom AI chips. But this hasn't hurt Nvidia's revenue so far, and the company's rapid pace of innovation in bringing new products to market should keep it in the driver's seat of the AI chip market.
That said, industry conditions can change quickly. In November 2021, right before the stock's big haircut, management was talking about strong demand it was seeing in AI for working with large language models and recommender systems. But that didn't prevent the data center market from slowing and pressuring Nvidia's revenue growth in 2022.
The best time to buy the stock historically is when the company is experiencing sluggish demand, because that usually coincides with a cheaper stock price before an industry recovery. The long-term outlook for Nvidia's data center business is solid, considering the $1 trillion of infrastructure that is shifting to more advanced computing hardware for AI workloads. But in the near term, Nvidia shares are already trading at a premium valuation that factors in this growth opportunity.
For this reason, it might be a good idea to wait until after Nvidia reports earnings on Aug. 28. There's always a chance the stock might dip, especially if management doesn't offer forward revenue guidance that is quite as high as analysts are expecting. This would provide investors a better value point to start a position.
John Ballard has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy .
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