Nasdaq 100 analysis: NVIDIA stock hits new highs on earnings blowout

The best performer in the S&P 500 this year and Wall Street’s favourite stock of 2023, NVIDIA, is providing support to global tech stocks after clearing what was a very high bar when it released quarterly results last night. NVIDIA is trading at new all-time highs today.

NVIDIA delivers record results

The chipmaker delivered record revenue, margins and earnings in the second quarter and its outlook was well ahead of forecasts. That is all thanks to the demand we are seeing for its AI chips and a return to growth for its gaming arm. Here is a snapshot of how it performed:

• Q2 revenue more than doubled from last year to $13.5 billion, smashing the $11 billion forecast.
• Adjusted gross margins hit a new record high of over 70%, helping adjusted EPS to rise 5-fold compared to last year to $2.70, also comfortably ahead of the $2.07 estimate.
• Outlook for Q3 sales of $16 billion impressed compared to the $12.4 billion pencilled-in by Wall Street.

Let’s put those numbers into more context and outline the jump in performance NVIDIA is delivering. The below chart shows just how big a leap forward NVIDIA has made at both the top-and-bottom line in just three months, with the outlook for the third quarter also bullish:

NVIDIA: AI partner of choice

The stellar results were driven by the eruption in demand for chips that are advanced and powerful enough to run artificial intelligence and machine learning applications. The global tech industry, from US behemoths like Microsoft and Amazon to Chinese giants Alibaba and Tencent, are racing to buy NVIDIA’s chips so they can upgrade their datacentres, which in turn will allow them to ramp-up their own AI services and start reaping financial rewards.

This is significant as all of this business is flowing to the chipmaker. NVIDIA is the only shop in town - and it is selling the all-important shovels needed as a new gold rush begins. It has a monopoly and is capitalising whilst it can, in the knowledge that rivals will be desperately racing to catch up in the coming years.

The result of all this demand dropping at NVIDIA’s door in just a few short months was datacentre sales of $10.3 billion in the second quarter. That was more than double the figure we saw just three months ago!

NVIDIA: Firing on all cylinders

While AI is grabbing all the headlines, NVIDIA’s remarkable performance was also helped by the fact its other markets are recovering. Sales of chips used in games consoles and other devices increased for the first time in over a year, and by more than anticipated, while its small arm that provides chips to the automotive industry continued to make progress.

With AI taking off and its other businesses back on the right track as comparatives start to iron-out, it appears NVIDIA is firing on all cylinders.

NVDA stock: Wall St more bullish than markets

Wall Street was already hiking their expectations for NVIDIA ahead of the results but another wave of brokers wasted no time in raising their target prices in wake of the blowout results.

JPMorgan, Wells Fargo Evercore ISI and TD Cowen all upped their view on NVIDIA to $600 this morning, while Bernstein made a larger hike to $675 from $475. Piper Sandler raised its view to $620 while Oppenheimer raised its target to $650. The highest target price is set by Rosenblatt and sits at a staggering $1,100. Even Morningstar, which was the only broker with a Sell rating on NVIDIA before the results, gave up and upgraded the stock to Hold, with it still holding a much more pessimistic view than others.

The average target price set by over 50 brokers covering NVIDIA has now moved to over $580 today from just $515 before the results, and has almost doubled from below $300 just three months ago! That suggests there is over 15.5% potential upside even despite the fact it is at fresh highs today, while the bulls with the biggest horns believe it could more than double in the next 12 months.

NVIDIA stock: What are the risks?

NVIDIA has never been in a better position than it is right now but there are risks ahead that could spoil the party, and they could be all the more damaging the higher NVIDIA’s share price and valuation rises. Markets are clearly confident it can keep up the momentum, but should be wary of potential headwinds over the coming quarters.

Firstly, its performance will ultimately be dictated by the speed it supplies the market. The strong beat shows this isn’t a problem right now and that NVIDIA is navigating any supply chain issues but this remains a threat considering media reports suggest NVIDIA could be hoping to treble or even quadruple output of its popular AI chips in 2024.

Secondly, and arguably the biggest threat at present, are tensions between the US and China. They have been imposing restrictions on one another in the hope of getting an advantage within the semiconductor market, with NVIDIA and other American chipmakers being banned from exporting their most advanced chips to Chinese firms. However, the industry has used loopholes, such as selling advanced but not top-notch chips, to China and this has so far not stoked an escalation in response at home. The US wants to make sure it stays one-step ahead of China but knows cutting it out entirely could cause major damage to its own companies and economy. NVIDIA said it is confident that current restrictions are having their desired effect said it doesn’t anticipate suffering a big financial hit in the immediate future. However, with a large chunk of sales flowing to China, any changes here have the potential to cause problems over the longer-term if US companies are cut off from one of the largest markets in the world.

Thirdly, the rampant demand for AI chips will, eventually, have some form of reality check. Virtually any business involved in tech appears to be throwing money at AI and NVIDIA is scooping up virtually every dollar being spent on vital hardware. However, we could see a shake-out occur if companies fail to reap returns from their AI investments or a slowdown in spending if companies find it harder to monetise their own AI applications. This is unlikely to be a concern anytime in the immediate future but could be a threat in the coming years, when tech companies will come under increasing pressure to justify their heavy investments and show that AI can deliver for them, not just NVIDIA.

Lastly, is NVIDIA’s valuation. It has earned its huge premium over its rivals after carving out a sizeable lead but this too will have to narrow at some point. When will depend on how quickly other chipmakers catch up.

Where next for NVDA stock?

NVIDIA shares are up over 8% in early premarket trade today, with the chipmaker poised to open at a new record high of $507.50.

We are now in unknown territory as it tests new highs. The rise we are seeing today, while strong, is much weaker than the jump we saw when it triggered excitement around AI in the previous quarter, but the bar is much higher today than it was back then. Still, the almost-unanimous agreement across Wall Street that NVIDIA has further to climb suggests the stock can keep up the momentum considering it is trading at the very bottom-end of analyst expectations right now, with some seeing potential for it to more than double over the coming year!

The RSI is in bullish territory but leaves scope for the stock to climb higher and, unsurprisingly, we are seeing trading volumes increase as NVIDIA continues to attract more interest to show buyers are firmly in control and have plenty of momentum before the opening bell today. It will be interesting to see if the rising trendline that can be traced back to May will come into play, although this would require a move toward $540.

The previous highs above $470 should now be regarded as a new floor for the stock.

Nasdaq 100 analysis: Where next?

NVIDIA is the poster child of AI and its results are providing welcome support for global tech stocks, which are seeing their valuations increasingly underpinned by their AI prospects. NVIDIA is also one of the largest members of the Nasdaq 100, making it the index to watch today. However, tread with caution. We have the Jackson Hole symposium today when markets will turn their attention to how Federal Reserve chair Jerome Powell feels about the fight against inflation, giving it the potential to change the mood of the markets.

Nasdaq 100 futures are up 1.3% today as tech stocks get a boost from NVIDIA, helping it continue rebounding following its sharpest correction of 2023. We are waiting to discover whether the lows of 14,550 we saw last week, when it hit levels not seen in over two months, marks the bottom of a temporary correction or is just the first wave lower, with the RSI in broadly neutral territory. With that in mind, we are looking for the index to either set new highs by breaking above 15,750 or a new low by falling beneath 14,550.

In terms of other Nasdaq 100 constituents on the rise today, the stocks experiencing some of the largest gains in premarket trade today on the back of the NVIDIA results are Tesla, Apple, AMD and Amazon. Other notable AI stocks in the broader market that are on the rise today include C3.ai, IonQ, SoundHound AI and Palantir.

Take advantage of extended hours trading

NVIDIA released earnings after markets closed yesterday and most traders must wait until they reopen the before being able to trade. But by then, the news has already been digested and the instant reaction in share price has happened in after-hours trading. To react immediately, traders should take their positions in pre-and post-market sessions.

With this in mind, you can take advantage of our service that allows you to trade NVIDIA and other tech stocks using our extended hours offering.

While trading before and after hours creates opportunities for traders, it also creates risk, particularly due to the lower liquidity levels. Find out more about Extended Hours Trading.