Wall Street gets more bullish on Nvidia (again). Where Jim Cramer stands going into earnings

Following a sharp slide from its mid-July record highs, Nvidia (NVDA) seems to be coming back into favor ahead of its quarterly release Wednesday evening. It’s hard to even fathom the words “back in favor,” considering the stock has more than tripled in 2023. But before last Monday’s 7% gain and this Monday’s more than 8% advance, shares of Nvidia had dropped nearly 14% from their all-time high close of $474.94 each on July 18 to their most recent closing low of $408.55 on Aug. 11. NVDA 3M mountain Nvidia 3-month performance Nvidia’s recent resurgence raises the already-high bar going into Wednesday’s earnings release as the semiconductor giant fights to keep up with the surging demand for its market-leading chips for artificial intelligence applications. Investors who recently bought Nvidia armed with sky-high expectations for the company’s fiscal 2024 second-quarter print could choose to flee, no matter what the company reports and guides. Considering that a key variable to Nvidia’s results is something outside of its hands — the supply of its AI chips — it’s best to view the stock on a multiyear horizon, not quarter-to-quarter. “The analysts are completely in charge. They just keep taking it higher, regardless,” Jim Cramer said Monday. Besides Apple (AAPL), Nvidia is the only other Club stock to get Jim’s “own it, don’t trade it” designation. “I’m not saying sell,” he stressed. “I just question the valuation being created by this endless level of enthusiasm.” An avalanche of research analysts have recently raised their stock price projections and tweaked their financial estimates for Nvidia. In the past 24 hours alone, HSBC hiked its Nvidia price target by 30% to $780 per share, among the highest on Wall Street, implying more than 66% upside from Monday’s closing price of $469.67 per share. Baird named Nvidia a top pick and said it sees the stock reaching $570 per share over the next 12 months, up from its prior $475 objective. KeyBanc’s new price target is $620 per share, from $550. These adjustments from HSBC, Baird and KeyBanc follow a steady stream of optimistic research notes last week , including one from Piper Sandler and one from Barclays, which said Nvidia has “no clear competitor close behind” in the race to financially benefit from the AI boom. The consensus price target for Nvidia has climbed to nearly $536 per share, according to FactSet, up about 7% since the start of the month. Estimates for Nvidia’s fiscal 2024 Q2 sales have risen modestly, by about 1% to $11.2 billion, according to FactSet. These August revisions come after the more dramatic changes to fiscal second- and third-quarter Wall Street estimates that occurred in late May and June, in the immediate aftermath of Nvidia’s jaw-dropping beat and raise on May 24 driven by the AI frenzy. Just as Nvidia’s guidance sparked its post-earnings surge in May, investors will be focusing closely on the company’s guidance for its current quarter. Expectations have been ratcheted up here, too. Sales in the three months ended October (fiscal 2024 third quarter) are now projected to be $12.6 billion, and earnings per share is expected to total $2.39, according to FactSet. For both metrics, that’s 4.4% higher than the consensus just a few weeks ago. Based on current estimates, Nvidia’s revenue for its October quarter is expected to more than double on a year-over-year basis, while EPS is projected to more than quadruple. If Nvidia’s guidance ultimately falls short of those lofty expectations, it likely would say more about the availability of its high-end AI chips than customer interest in buying them. After all, the latest earnings reports from cloud-computing giants — including Club holdings Microsoft (MSFT) and Alphabet (GOOGL) — indicate that increased spending on AI infrastructure is alive and well . (Based on its AI prowess, the Club added some more shares of Microsoft on Monday since the stock’s post-earnings decline.) A major question mark is supply and whether Nvidia, which relies on contractors such as Taiwan Semiconductor Manufacturing Company (TSM) to produce its chips, has adequate product to meet demand. On its earnings call in late July, TSMC’s chief executive, C.C. Wei, said it has been “very hard to fulfill 100%” of what its advanced-packaging customers, such as Nvidia, have needed. While TSMC is working to add capacity for this process known as “chip on wafer on substrate,” or CoWoS, Wei said the constraints may not ease until the second half of next year. Another key theme going into Nvidia’s print is the state of its China business. There’s no doubt technology giants in the world’s second-largest economy want Nvidia’s chips to build out their AI systems. But there’s uncertainty around what the U.S. government will eventually allow to be sold. In the interim, Chinese companies such as Alibaba (BABA) and TikTok parent ByteDance have reportedly placed massive orders — totaling roughly $5 billion, according to the Financial Times — to front-run any tighter export controls that Washington might impose. That should be positive for Nvidia’s near-term results. But bigger picture, analysts at Citigroup said in a note to clients last week that investors want to know more about the sustainability of orders coming from Chinese firms. Nvidia currently sells throttled-back versions of its most-powerful AI chips in China, which were created last year to comply with the Biden administration’s initial restrictions to address U.S. concerns about the technology being used by the Chinese military. According to the Wall Street Journal, the U.S. is weighing even tougher export controls that would also cover the less-powerful modified chips, known as the A800 and H800. Nvidia’s unmodified versions are called the A100 and H100. Nvidia has said stricter export rules would have a minimal financial impact in the near term because demand in the rest of the world is strong enough to fill the void. But, over the long run, the company said it would feel an impact from lost opportunities in China. Sales to China have comprised 20% to 25% of Nvidia’s overall data-center revenue, CFO Colette Kress told investors in June in response to the Journal’s initial report on the matter. Data center sales accounted for about 60% of companywide revenue in Nvidia’s fiscal 2024 first quarter. Bottom line Nvidia maintains its position as one of our two “own it don’t trade it” stocks, despite our reservations around the recent drumbeat of price-target hikes and estimate revisions. The hype into the quarter has created a situation where a slight shortcoming could lead to an outsized decline in the stock, as short-term traders head for the exits. Investors with longer time horizons should be mindful of this setup and willing to see through it because Nvidia’s place as the dominant purveyor of AI chips will reap rewards well beyond the next quarter or two. (Jim Cramer’s Charitable Trust is long NVDA, MSFT and GOOGL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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