Semiconductor company Nvidia(NASDAQ: NVDA) has become the quintessential artificial intelligence (AI) stock for many investors. Since ChatGPT launched in late 2022, Nvidia shares have surged about 950%, making it the best performing stock in the S&P 500(SNPINDEX: ^GSPC).
On Wednesday, Nov. 20, Nvidia will announce earnings for the third quarter of fiscal 2025, which ended in October 2024. I expect the stock to soar in the days and weeks following the report for three simple reasons. Read on to learn more.
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1. Nvidia will likely provide an encouraging update regarding its Blackwell GPUs
Nvidia builds the most coveted graphics processing units (GPUs) in the computing industry, as they have become the gold standard in accelerating artificial intelligence (AI) workloads. Indeed, Nvidia holds over 80% market share in AI accelerators, and Forrester Research recently wrote, "Without Nvidia GPUs, modern AI wouldn't be possible."
Nvidia told investors last quarter that the production ramp for its next-generation Blackwell GPU would begin in the fourth fiscal quarter (i.e., the current one) of 2025, which ends in January 2025. Management will likely provide an update during the third-quarter earnings call, and shareholders have reason to anticipate good news. Earlier this year, CEO Jensen Huang said Blackwell would be the most successful product launch in company history.
Additionally, Nvidia executives recently told analysts that Blackwell GPUs are already "booked out 12 months." That means demand for the new processors is so strong that it will take the company an entire year to work through its existing order backlog. Consequently, Nvidia will like give encouraging guidance on Nov. 20, which sould drive the stock higher.
2. Wall Street analysts have been revising their earnings estimates higher
Nvidia has provided encouraging third-quarter guidance. Management said revenue would increase 80% to $32.5 billion (plus or minus 2%) due to continued demand for the current generation of GPUs, called Hopper. Management also said non-GAAP earnings would increase 80% to $0.72 per diluted share (plus or minus 2%).
However, Wall Street analysts have steadily raised their third-quarter earnings estimates since Nvidia gave its initial guidance. The consensus now calls for earnings to increase 85% to $0.74 per diluted share, according to LSEG. Analysts have also raised their price targets, such that the consensus of $156 per share implies 10% upside from the current share price of $142.
Wall Street analysts are not omniscient, but their insight is valuable because they have more resources than retail investors. The fact that analysts have become more optimistic ahead of Nvidia's third-quarter report is a good sign. It suggests very thorough research has uncovered signs of strong demand. That could drive the stock higher after Nov. 20.
Image source: Getty Images.
3. Nvidia's customers expect capital expenditures to increase in the coming quarters
Nvidia counts all of the largest hyperscale cloud computing companies among its customers. That includes Alphabet, Amazon, Meta Platforms, and Microsoft. Those companies have not only invested aggressively in AI infrastructure throughout 2024, but also expect capital expenditures to increase next year.
Alphabet's capital expenditures totaled $13 billion in the third quarter, most of which went to infrastructure, and management expects a similar level of spending in the fourth quarter. But CFO Anat Ashkenazi told analysts, "We do see an increase coming in 2025."
Amazon expects capital expenditures to total about $75 billion in 2024. But CEO Andy Jassy recently told analysts, "I suspect we'll spend more on that in 2025." He said most of that capital was earmarked for its cloud computing business, and he specifically mentioned generative AI as the impetus.
Meta Platforms' capital expenditures will total about $40 billion in 2024, most of which has been allocated to AI servers. However, CFO Susan Li told recently told analysts, "We expect a significant acceleration in infrastructure expense growth next year."
Microsoft's capital expenditures totaled $20 billion in the first quarter of fiscal 2025, which ended in October 2024. CFO Amy Hood told analysts, "We expect capital expenditures to increase on a sequential basis given our cloud and AI demand signals."
Some spending discussed above reflects strong demand for Blackwell. However, Nvidia also builds central processing units (CPUs) and networking equipment. In fact, the company has secured a leadership position in AI networking gear, according to Bloomberg. So, the uptick in capital expenditures further supports the idea that Nvidia will give encouraging guidance when it announces results for the third quarter. That could drive the stock higher after Nov. 20.
However, the more important takeaway is that Nvidia has a key competitive advantage in vertical integration. Because the company effectively designs entire data centers, Nvidia can build systems with a superior total cost of ownership, according to Jensen Huang. That should keep the company ahead of its competitors in the coming quarters and years. Indeed, Morgan Stanley analyst Joseph Moore recently wrote, "The market tends to underestimate the difficulty of competing with Nvidia."
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. 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. Trevor Jennewine has positions in Amazon and Nvidia. 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.
