Should You Buy Nvidia Stock Ahead of Q2 Earnings?

Nvidiahis (NVDA 4.55%) journey from a niche gaming hardware company to a $3.18 trillion tech behemoth provides an excellent example of the potential that long-term investing offers. A $1,000 investment made a decade ago has grown to $270,790. But as this stock’s ongoing rally (largely driven by the artificial intelligence (AI) trend) fades away, investors may want to pay more attention to its results for clues about what the coming years might bring.

With each passing quarter, more investors are asking: Is Nvidia stock still a buy, or is it time to take profits before a disappointing earnings report sparks a potential price bubble?

Let’s dig deeper.

He will receive Harder to impress the market

During earnings season, retail investors often become confused when their stocks fall despite rising revenues and profits. Price fluctuations are usually related more to inventory valuations related to projected future performance, no current performance. So if a company doesn’t consistently beat expectations, its stock can fall even after what would otherwise be considered good business results. This could become a major challenge for Nvidia as it tries to build on already spectacular results from previous periods.

In the second quarter of fiscal 2024 (which is mostly associated with calendar year 2023), Nvidia’s revenue rose 101% year-over-year to $13.51 billion. That figure falls short of analysts’ expectations of $28.7 billion in revenue in Q2 of fiscal 2025. Meeting or beating those lofty market expectations will be key for Nvidia to maintain its 40x sales valuation . S&P 500 average just under 3.

Can the margins stay this high?

Part of the reason why Nvidia can justify such a high valuation gross marginswhich compares the selling prices of its products with their direct production costs. Last quarter, that number rose to 78.4%, helped by industry-leading AI. graphics processing units (GPU) such as the h100, which sell for around $25,000 per unit. For context, Microsoft has a gross margin of less than 70% despite selling mostly digital software as a service instead of physical products.

Nvidia can take advantage of its chip shortage and competitive advantages, such as its CUDA GPU-related software platform (which programmers are more familiar with).) to increase the consumer price. And investors should keep a close eye on gross margins in the second quarter and beyond.

Image source: Getty Images.

So far, competition from rivals ca Advanced microdevices it did not lead to noticeable margin pressure. But Nvidia’s best supplier Taiwan Semiconductor Manufacturing has floated the idea of ​​raising its production prices to get a bigger slice of the pie. Capitalism tends to erode excess margins, and Nvidia’s windfall probably won’t last forever.

Look for signs of economy slow

Earlier this month, higher-than-expected unemployment numbers set off alarm bells on Wall Street. And according to analysts from JP Morganthe probability of a US recession is 35% before the end of the year. Investors should look for signs of these trends in Nvidia’s earnings.

Nvidia will be sensitive to changes in macroeconomic sentiment, as its high-end AI GPUs are arguably “luxury” technology products that are not essential to the core operations of many of its customers. Consumer oriented large language patterns (LLM) are generally not profitable, making them likely to be among the first segments cut if the economy weakens.

While AI could become one of the most transformative tech megatrends of recent years, this bears an uncanny resemblance to the dot.com bubble in the early 2000s. The industry could unravel quickly if companies decide it’s not worth investing anymore so much in a largely unproven opportunity.

Is Nvidia stock a buy?

If the past two years of earnings are indisputable, betting against Nvidia is usually a bad idea. The chip maker has continuously proved its naysayers wrong with incredible results quarter after quarter. And the second quarter of fiscal 2025 may not be an exception.

That said, investors should also be aware that the risks of owning Nvidia are starting to increase — possibly more than the potential rewards. The company will face increasingly difficult compensation as it tries to top its already fantastic earnings. And its unusually high margins may eventually come under pressure from suppliers and competition. The increasing likelihood of a near-term recession is likely the biggest possible headwind. And this it may be a good idea to take profits before the change in the macroeconomic environment.