NVIDIA Q3 preview: Where next for the NVIDIA share price?

When will NVIDIA release Q3 earnings?

NVIDIA will publish third quarter earnings on Wednesday November 17.

NVIDIA Q3 earnings preview: what to expect from the results

NVIDIA reported record revenue in its last set of results, spurred-on by growing demand for chips used in games consoles, data centers and even cryptocurrency mining rigs, and investors are rightly feeling confident ahead of the third quarter earnings out this week.

Wall Street is expecting NVIDIA to report revenue of $6.82 billion, above the company’s guidance for $6.80 billion. That would be up from $4.73 billion the year before and mark a new quarterly record from the $6.51 billion booked in the second quarter. Below is a breakdown of revenue expectations by division, according to consensus numbers from Bloomberg:

Markets are expecting the data center division to grow at a considerably faster rate quarter-on-quarter than the gaming segment, which could lead to an improvement in profitability. Analysts anticipate strong sequential growth in the data center division will be driven by rising demand for hyperscale cloud solutions and continued lifts in business spending on their IT networks, underpinned by higher value and higher margin GPUs. Businesses are shifting from older central processing units (CPUs) to GPUs so systems can handle more advanced tasks and software such as artificial intelligence and deep learning. Consensus numbers show that NVIDIA’s gross margin is expected to rise to 67% in the third quarter from 66.7% (64.8% GAAP) in the second. If achieved, that would be the third consecutive quarter of better margins.

Meanwhile, the gaming division is expected to be impacted by the continued pressure being applied to supply chains. Having grown 11% sequentially in the second quarter, analysts are only forecasting a tepid 3.8% quarter-on-quarter growth in the third. However, strong numbers out from its key supplier, Taiwan Semiconductor Manufacturing Co (TSMC), which saw sales up over 11% sequentially in the third quarter, suggests supplies may have been more resilient than expected. However, it is worth noting that TSMC saw sales down 12% in October versus September, which may signal weakness in the last month of NVIDIA’s quarter.

Net income is forecast to rise to $2.25 billion in the third quarter from $1.34 billion last year, with diluted EPS anticipated to follow higher to $0.89 from $0.53.

NVIDIA shares have dipped since hitting all-time highs on November 8, with the stock having rallied over 130% since the start of 2021. That means, compared to forecasts for annual diluted EPS of $4.13 this year, that NVIDIA trades at a price-to-earnings ratio of over 73x. That is significantly higher than its average P/E ratio over recent years, driven by the boom in demand for chips and GPUs over the last two years and higher growth expectations as more devices become connected. The major acquisition of Arm, which was announced over a year ago, has also have fed through to its valuation despite the fact it continues to battle against regulatory headwinds. Still, if cleared, the acquisition will provide another huge catalyst for the stock.

Arm is a major licensee of tech used in chips built by major companies all around the world and NVIDIA has promised to ensure Arm’s designs will remain available to competitors, although regulators remain wary of how the deal could impact competition and innovation in such a crucial sector.

With that in mind, the 45 brokers that cover NVIDIA have an average Buy rating on the stock but the average target price of $261.69 implies the company is over 14% overvalued following the recent surge in its share price. However, the most recent updates to target prices suggests others will follow and that there is still headroom for the stock. For example, last week alone we saw Evercore ISI raise its target on NVIDIA to $350 from $223, Wedbush to $300 from $220, Susquehanna to $360 from $250 and Truist Securities to $260 from $257.

Where next for the NVIDIA share price?

The NVIDIA share price has been steadily trending higher, forming a series of higher highs and higher lows across the year. 

The rally stepped up a pace in late October and the price surged to an all-time high of $324.  

More recently the price has eased off resistance at $324 and is consolidating around $303, whilst capped by last week’s low of $287. However, the RSI remains firmly in overbought territory so further consolidation or a pull back could be on the cards. 

Bulls will be looking for a move back over $324 to reach fresh all-time highs.  

On the flip side, a fall below $287 could expose the 20 sma at $262. It would take a move below the 50 sma at $234 to remove the bullish bias. 

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