Nvidia (NASDAQ: NVDA) is the most-watched tech stock. There's no question. Its upcoming earnings, which come after the majority of the industry and all of the "Magnificent Seven" have already reported, are hotly anticipated.
As the centerpiece of the artificial intelligence (AI) revolution, Nvidia saw its revenue skyrocket from the end of 2022 to now. It couldn't sell its Superchips fast enough -- literally, at its peak, there was an 11-month backlog for them. This extreme demand led to incredible pricing power and the ability, it seemed, to print money.
For the last four consecutive quarters, Nvidia grew its earnings per share (EPS) by more than 400% year over year. The market reacted, sending the company's stock on a rapid ascent, more than tripling from July 2023 through July 2024. Maybe some investors thought the ride would never stop, but since its peak in mid-July, the stock is down about 8%.
It's natural for a stock to cool off at times. However, there's been some outsized fear surrounding this dip for many investors worried about a possible recession, Nvidia's income growth slowing significantly, or AI failing to deliver on its promise. While these fears are valid, and skepticism is healthy, I think Nvidia has a ways to go.
Any short-term retreat like this is just that, short-term. Although Nvidia's next earnings may not blow estimates out of the water like some of its previous quarters -- expectations are higher these days -- I think they will still meet or exceed them, and the market will react as it has all year when Nvidia posts its numbers. I think this trend will continue, and Nvidia's share price will continue to rise through the rest of the year.
I won't go into detail about a recession; just remember to take warnings about an impending one with a grain of salt. Yes, there have been some concerning numbers, like the last jobs report, but this is a long way from full sirens and flashing red lights. There is still a lot the Federal Reserve can do to steer the economy in the right direction. It is too premature to say one is coming.
Let's take a look at the other two concerns.
Big tech's spending spree isn't slowing -- that's good news for Nvidia
Nvidia's incredible revenue growth is driven primarily by tech giants like Amazon and Microsoft. These firms are constantly upgrading and expanding their data centers to meet the massive AI-driven demands, and at the heart of these data centers are Nvidia's chips.
The cash flowing into Nvidia isn't slowing because the cash flowing out of big tech isn't slowing. During recent earnings calls, CEOs from around Silicon Valley emphasized the need to increase their AI-focused investments. Alphabet, which spent around $31 billion in capital expenditures in 2023, is on track to spend about $50 billion this year.
In tech, the worst thing you can do is get left behind. As Alphabet's CEO put it in its call, "The risk of underinvesting is dramatically greater than the risk of overinvesting for us here." Now, Nvidia has to defend its market share, but it's clear the faucet isn't getting shut off just yet.
There are signs that AI is starting to deliver returns
This tech is still new. It's easy to forget that. A lot of people have been concerned, myself included, that the real-world value of AI just isn't adding up to its enormous cost. I think this is definitely something to continue to watch, but for now, there are positive signs. The biggest of which, in my opinion, is Meta's earnings call.
Meta posted 22% year-over-year revenue growth and a whopping 73% jump in earnings per share year-over-year. During the company's earnings call, Zuckerberg credited AI for improving content algorithms, boosting engagement, and, ultimately, helping increase advertising revenue.
There have also been studies showing other companies are benefiting. An International Data Corporation (IDC) study last fall surveyed more than 2000 businesses around the world. The researchers found that companies averaged a $3.5 return for every $1 they invested in AI. That's pretty impressive. I should point out that this was commissioned by Microsoft, so keep that in mind, but it was independently conducted by IDC.
How this bears out in the long run is still to be seen, but there is reason to believe AI could fulfill its promise.
Should you invest $1,000 in Nvidia right now?
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
Prediction: Nvidia's Big Stock Pullback Will Lead to Even Bigger Gains by Year's End was originally published by The Motley Fool