Nvidia ((NVDA Quick QuoteNVDA - Free Report) ) has captured the market's imagination, emerging not just as the world's largest publicly traded company but also as the undisputed leader of the AI revolution. With its stock up nearly 200% year-to-date and an extraordinary 900% gain since early 2023, expectations for its upcoming earnings report are sky-high.

Investors and analysts alike are eagerly watching Nvidia's next move, particularly as demand for its cutting-edge Blackwell GPUs continues to soar. Nvidia reports quarterly earnings this Wednesday, November 20 after the market closes.

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Key Factors Driving Nvidia's Earnings Momentum

• AI Revolution as a Tailwind: Nvidia is at the forefront of the generative AI boom. The company's GPUs are integral to training large language models and other AI applications, including data processing and autonomous systems. The ramp-up in data center investment and cloud AI infrastructure by big tech players like Microsoft (MSFT Quick QuoteMSFT - Free Report) , Alphabet (GOOGL Quick QuoteGOOGL - Free Report) , and Amazon (AMZN Quick QuoteAMZN - Free Report) continue to create immense demand for Nvidia’s high-margin products.

• Upward Earnings Revisions: Analysts have consistently revised their estimates higher over the past quarter, solidifying Nvidia’s Zacks Rank #1 (Strong Buy). For the current quarter, the consensus EPS estimate has climbed from $2.81 to $2.84 in the past 60 days, with projections for next fiscal year showing even more aggressive growth. Earnings are forecast to grow at an impressive 36% annually over the next three to five years.

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• Expected Surprise Prediction (ESP): Nvidia’s ESP stands at 2.24%, which historically indicates a favorable chance of beating earnings estimates. This is supported by Nvidia’s impeccable record of delivering four consecutive earnings beats, with surprises as high as 19.64% in recent quarters.

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Market Expectations and Catalysts for NVDA Stock

The upcoming report isn't just about whether Nvidia can beat expectations—it's about whether the company can justify its valuation. Nvidia is currently trading at 36x next year's earnings estimates, a multiple that, while elevated, is not unreasonable for a company with Nvidia's growth trajectory. This valuation hinges on the company’s ability to sustain its rapid earnings growth, which is fueled by its dominance in AI and cloud computing.

For context, Nvidia’s valuation is significantly lower than the triple-digit P/E ratios seen during the height of the dot-com bubble or the early stages of the AI hype cycle. However, this relative moderation doesn’t eliminate the pressure on the company to deliver strong results.

Key questions for the report include:

• Blackwell Sales Trajectory: Can Nvidia continue to meet insatiable demand for its GPUs amid reports of supply constraints?
• Competitive Landscape: Nvidia’s market leadership is tied closely to partnerships with Microsoft, Amazon, and Alphabet and other hyperscalers whose investments in AI infrastructure both support Nvidia’s growth and pose competitive risks as they explore proprietary chip development.
• Guidance and Earnings Growth: Analysts expect earnings growth of 85%+ year-over-year this quarter. Nvidia’s ability to guide confidently into 2024 will be a major factor in maintaining investor confidence at current valuation levels.

Technical Strength: Nvidia Stock Near Record Highs

Nvidia’s meteoric rise has been fueled by consistent earnings beats and its role as a pure-play AI leader. Technically, the stock is trending strongly.

Nvidia stock currently sits just below its all-time high, which is certainly encouraging and a sign of robust demand and sustained buying pressure. However, despite this strength, the current rally leaves Nvidia somewhat extended, creating risk for a pullback if earnings fail to meet lofty expectations.

We can see that the price broke below a trendline this week that had been forming since the start of September. Whether this is an ominous signal, or was an attempt to shake weak shareholders before the meeting is unclear though.

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Strategic Considerations for Nvidia Shareholders

Earnings events are often a coin toss, and Nvidia’s report is no exception. Here’s how investors might approach the event:

For Long-Term Holders: Nvidia’s dominance in AI and its track record suggest that holding through the report could pay off handsomely. However, trimming some exposure ahead of earnings may reduce portfolio volatility, especially given the stock’s lofty valuation.

For Prospective Buyers: It may be wise to wait for post-earnings clarity before initiating a position. A sharp pullback could offer a more attractive entry point.

What Could Go Wrong?

Despite Nvidia’s bullish set-up, several risks could derail its momentum:

• Guidance Miss: Even a small miss on guidance could send shares sharply lower, given the high expectations already baked into the stock.
• Valuation Concerns: At a forward P/E of 36x, any sign of slowing growth or margin compression could lead to profit-taking.
• Broader Market Conditions: If macroeconomic headwinds such as higher interest rates or geopolitical tensions intensify, growth stocks like Nvidia could face outsized pressure.

Should Investors Buy Nvidia Stock?

Nvidia remains one of the most compelling stories in the stock market today. The company’s dominance in AI hardware, its strong earnings momentum, and the ongoing secular growth trends in AI and cloud computing all make for a powerful investment thesis.

That said, with the stock’s valuation relatively stretched and earnings as unpredictable as ever, investors should proceed with caution. For those already holding Nvidia, the long-term growth potential outweighs the short-term risks, but trimming profits may be prudent. For new investors, patience might be the best strategy, as post-earnings volatility could provide a more favorable entry point.

As Nvidia gears up to report, one thing is certain: all eyes are on the AI giant to deliver another blockbuster performance.