Nvidia (NASDAQ:NVDA) is no longer the most valuable company in the world as of Election Day. Its stock dropped almost 10% in one day, and recent news about CEO Jensen Huang being a possible target of spying sent the stock down even further.
The timing here works out to be just one week before Nvidia is scheduled to report its fiscal 2027 third-quarter earnings on Nov. 17. Is it a buy ahead of that report?
Nvidia is at the center of AI development
A swath of stocks took a hit after the election as numerous Democratic candidates who have promised to push for a slowdown in artificial intelligence (AI) development and the AI data center build-out won their races.
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Some AI stocks rose on the news, including Amazon, since the market has been worried about the extraordinary amount of money it is laying out on data centers, and investors welcomed the possibility of it slowing its spending spree.
Image source: Nvidia.
Nvidia, though, benefits from AI spend, which is why its share price dropped so quickly. It’s the main provider of the graphics processing units (GPUs) that power AI workloads, with up to 95% of the data center GPU market.
Wall Street expects the company’s revenue to increase 91% this year, and Nvidia management has already provided guidance for a 70% sales increase next year. It called that a “supply-constrained outlook.” However, if AI companies are compelled to slow down their build-outs and model development, reduced spending could hurt their chances of making that happen.
What could happen on Nov. 17?
For the fiscal third quarter, which ended Oct. 25, management is guiding for about 90% sales growth, and Wall Street expects $2.47 in earnings per share, up from $1.30 last year. Nvidia tends to easily beat expectations, and the stock generally rises after its earnings reports, but not always.
One area the market will be watching is gross margin. Nvidia is guiding for about 74%, but that’s lower than recent levels.
NVDA Gross Profit Margin (Quarterly) data by YCharts
That decline is connected to the rising cost of memory chips, which have been plaguing many AI companies.
At the current price, Nvidia stock trades at a low valuation of 11 times next year’s expected earnings. If management provides updates that expectations for next year haven’t changed for the worse, the stock is likely to rise; a lower P/E ratio usually indicates that the market doesn’t think a company can keep growing earnings at a fast rate. If it can, the P/E ratio should rise.
