All Eyes on Nvidia: The Most Crucial Earnings Report of the Season

As NVIDIA ($NVDA(NVDA)) gears up to report its fiscal Q2 2025 earnings, the stakes couldn't be higher for the broader market. Widely recognized as the driving force behind the ongoing AI revolution, NVIDIA has become the market's bellwether, with its performance often setting the tone for overall investor sentiment. As the undisputed leader in AI technology, particularly through its data center and GPU offerings, NVIDIA's results will not only reflect its own growth trajectory but also provide critical insights into the health and momentum of the AI industry at large. Given its outsized influence, NVIDIA's earnings report is poised to be a pivotal event, potentially shaping market direction and sentiment for the weeks ahead.

NVIDIA is set to report its fiscal Q2 2025 earnings after the market closes on Wednesday, August 28th. Analysts are expecting a strong performance, with revenue projected to reach $28.84 billion and earnings per share (EPS) anticipated at $0.64. These figures represent substantial year-over-year growth, with revenue more than doubling from the same period last year, reflecting a 137.84% increase. 

The market will be closely watching NVIDIA's guidance for the upcoming quarters, as the company has consistently delivered big beats in both earnings and revenue in previous reports. For the fiscal third quarter of 2025, analysts expect continued strong performance with revenue growth of 75.4% to $31.8 billion and EPS growth of 77% to $0.71. Investors are particularly focused on the company's ability to sustain its impressive gross margins, which are projected to be around 75.5% for Q2 and slightly lower at 75% for Q3.

Key topics for investors will include updates on data center growth, particularly in light of the ongoing AI arms race, as well as any impact from reported delays in the Blackwell chip. NVIDIA's dominance in AI, especially through its data center offerings, has been a significant driver of its recent stock performance, which saw a 262% year-over-year revenue increase in Q1, with the data center segment alone growing by 427%. However, concerns about the Blackwell delays and increasing competition, particularly from AMD, may weigh on future growth expectations.

Another aspect that could impact NVIDIA's future performance is its potential for significant share buybacks, given its expected free cash flow of over $270 billion in the next three years. This could reduce the company's share count, providing a boost to EPS and supporting the stock price. However, the market will be looking for clarity from management on how they plan to utilize this cash, particularly in the context of any delays or competitive pressures.

While NVIDIA is expected to report strong Q2 results, the real test will be in its guidance and the market's reaction to any signs of slowing momentum or increased risks. The company's ability to navigate these challenges and continue to deliver on its growth promises will be critical in determining whether it can maintain its lofty valuation and investor confidence.

Analyst Expectations for the Quarter

NVIDIA has maintained a flawless record of beating earnings over the past two quarters, largely due to supply constraints. Bloomberg data shows that, on average, the company has exceeded sales expectations and raised guidance by 12.5% over the last six quarters.

NVIDIA's trend of significantly surpassing revenue expectations has noticeably cooled in recent quarters. While the company consistently beat revenue estimates by substantial margins—ranging from 12.63% to 26.13% in 2023—the most recent quarters in 2024 have seen a decline in the percentage of outperformance, with beats narrowing to around 5.49% and 8.37%. This suggests that analysts have become more accurate in their revenue forecasts, likely adjusting their models to better account for NVIDIA's growth trajectory.

Furthermore, the guidance surprises have also shown a similar trend. Initially, NVIDIA's forward guidance consistently exceeded analyst expectations by a wide margin, with guidance surprises of over 10% in 2023. However, more recent quarters have seen a moderation in these beats, with guidance only slightly exceeding estimates. This indicates that analysts have adjusted their expectations closer to the company's actual performance, reflecting a more stable and predictable revenue environment for NVIDIA moving forward.

As NVIDIA prepares to report its fiscal Q2 2025 earnings, investors are particularly focused on the performance and outlook of its data center segment, which has been a cornerstone of the company's explosive growth in AI technology. Expectations are high for the continued ramp-up of Hopper shipments and GPU system production. However, there are concerns about potential delays in the launch of the new Blackwell AI chip, which could temper expectations for NVIDIA's future quarters. Despite these risks, analysts like those from Goldman Sachs and Jefferies remain confident that NVIDIA will exceed both revenue and earnings expectations, driven by robust AI infrastructure investments from major tech companies.

The tone of NVIDIA's earnings report will be closely scrutinized, especially regarding any updates on Blackwell's timeline and how it might impact future quarters. While some analysts have raised their FY25 EPS estimates due to the anticipated success of the H200 and H20 SKUs, others have left their FY26 estimates largely unchanged, reflecting uncertainty about the near-term impact of Blackwell delays. 

Revisions ahead of the earnings report have been overwhelmingly positive, with 30 upward revisions for NVIDIA's EPS and 28 for revenue, signaling strong confidence among analysts despite the challenges. Key risks include NVIDIA's ability to maintain its current growth trajectory amid delays and increasing competition from AMD, as well as its ability to meet the market's high expectations for data center revenue. Forward data expectations remain bullish, with some analysts projecting NVIDIA's potential sales in 2025 could reach up to $265 billion if the company can successfully navigate its supply ramp and sell 100% of its production at full prices. However, any missteps in executing this ambitious growth plan could lead to significant downside risks, particularly given the high valuation currently priced into NVIDIA's stock.

Data Center Continues to Drive Results

NVIDIA's data center segment has seen explosive growth, driven by surging demand for its advanced computing technologies to support AI initiatives. In the first quarter of fiscal 2025, data center revenue reached a record $22.6 billion. For the fiscal second quarter, analysts expect this segment's revenue to hit $25.19 billion, marking another record and more than doubling from the same period last year. This robust performance highlights the central role of NVIDIA's data center business, which now represents more than 85% of the company's total revenue.

Looking ahead, the data center segment is expected to continue its upward trajectory, with a forecasted 8% quarter-over-quarter growth in fiscal Q2, translating to a 136% year-over-year increase. The introduction of the H200 chip in fiscal Q3 and the anticipated ramp-up of the Blackwell series in fiscal Q4 and into FY2025 are expected to further drive this growth. Despite some concerns about potential delays with the Blackwell chip, investor sentiment remains optimistic, with expectations of $26-$27 billion in data center revenue for fiscal Q2 and a projected $28 billion or more in fiscal Q3. This segment's dominance underscores its critical importance to NVIDIA's overall revenue and growth strategy.

The Blackwell Concerns

Concerns around NVIDIA's Blackwell chip have stirred significant unease in the market, particularly regarding potential delays in its production and delivery. Reports of these delays helped facilitate a drop in NVIDIA's stock earlier this month, as investors worried about the impact on the company's growth trajectory. Although NVIDIA has indicated that production is still on track to ramp up in the second half of the year, some analysts believe the delays could extend by as much as 120 days, rather than the initially speculated 90 days. This could push back the deployment of Blackwell chips into key customers' data centers, such as Microsoft, Google, and Meta, potentially shifting the timeline of major AI infrastructure projects to early next year.

The delays are primarily attributed to challenges with the advanced CoWoS (Chip-on-Wafer-on-Substrate) packaging technology used by TSMC, which has led to issues like chip warping and circuit design flaws. These technical difficulties have not only slowed down production but have also raised concerns about the yield and overall readiness of the Blackwell chip. 

Despite these setbacks, some analysts suggest that the market may be overreacting. They argue that the impact might be modest, with demand for earlier chips like the Hopper series potentially increasing to fill the gap left by Blackwell. The bulk of Blackwell's impact is expected to be felt in 2025, meaning that any near-term delays might have limited effect on NVIDIA's results.

However, the stakes are high for NVIDIA, as any prolonged delays could erode its dominant market share, especially as competitors like AMD make strides with their own GPUs, such as the MI300X. With NVIDIA holding a commanding 98% share of the data center GPU market, any misstep could open the door for competitors to gain ground. The market's ultra-bullish outlook on NVIDIA, despite these challenges, underscores the high expectations placed on the company. While some believe the delays might be manageable in the long run, the situation introduces a level of uncertainty that could affect investor confidence, particularly if the company fails to meet its ambitious growth targets in the near term.

Q1 RECAP

NVIDIA delivered an outstanding Q1 performance, highlighting its dominant position in the AI landscape. The company's adjusted EPS came in at $6.12, representing an astonishing 400% year-over-year increase, while revenue surged by 262% to $26.04 billion, far exceeding its own forecast of $23.52-24.48 billion. 

This exceptional growth was primarily driven by the Data Center segment, which saw an impressive 427% year-over-year revenue increase. This surge underscores the strong demand for NVIDIA's Hopper GPUs, even as customers anticipate the upcoming, more powerful Blackwell platform. 

Other segments, including Gaming, Professional Visualization, and Automotive, also contributed to the overall growth with double-digit year-over-year revenue increases, reflecting broad-based strength across NVIDIA's business.

Looking ahead, NVIDIA provided robust guidance for Q2, projecting revenue between $27.44 and $28.56 billion, which represents approximately 107% year-over-year growth. The company also anticipates non-GAAP gross margins to moderate slightly, expected to land around 75.5%, down from 78.9% in Q1, aligning with management's earlier comments regarding the tapering off of favorable component costs. 

Despite some concerns about potential order delays with the introduction of the Blackwell platform, NVIDIA reassured investors that demand remains strong and that they expect significant Blackwell-related revenues to start flowing in earlier than initially expected, possibly by the end of this year. 

While risks remain, particularly around the timing of AI-driven productivity gains and potential overcapacity, NVIDIA's strong guidance and dominant position in the AI market suggested continued strong performance in the upcoming quarters.

VALUATION

NVIDIA's high valuation is another point of focus. The company is currently trading at a forward P/E ratio of 33x and is projected to maintain a strong cash flow, with a forward cash-adjusted PEG ratio of 1.60. While NVIDIA's growth prospects justify a premium valuation, some analysts caution that the company may be nearing peak bullishness, particularly if growth expectations become harder to meet. 

NVIDIA's valuation metrics present a compelling case when compared to its peers in the technology sector, particularly in terms of Enterprise Value to Free Cash Flow (EV/FCF). As we look from 2024 through 2026, NVIDIA's EV/FCF is expected to remain robust, reflecting the company's ability to generate significant cash flow relative to its enterprise value. This positions NVIDIA favorably against other top technology companies, especially when considering its consistent and growing free cash flow.

The company's valuation is further supported by its capex-light business model, where Taiwan Semiconductor Manufacturing Company (TSMC) bears the capital expenditure burden. This model allows NVIDIA to maximize its free cash flow generation, which is projected to exceed $270 billion over the next three years.

• Source: Melius Research

NVIDIA's ability to convert free cash flow into non-GAAP net income is expected to be around 90% in FY25 and FY26, which is a negligible discount compared to many cloud giants, who are also its customers. This strong cash flow conversion highlights NVIDIA's operational efficiency and strengthens its valuation argument relative to its peers. Furthermore, with the potential to generate such significant free cash flow, NVIDIA could return a substantial portion of this cash to shareholders, potentially through share buybacks.

If NVIDIA were to allocate $270 billion to share repurchases, it could reduce its share count by approximately 9% at the current stock price of around $125. This potential for large-scale buybacks raises important questions for the CFO regarding how management plans to deploy this cash, an enviable problem that reflects the company's strong financial position and future growth prospects.

Options Trading

The $130 price level is emerging as a critical area of focus for NVIDIA's options market heading into its earnings report. A significant amount of options activity has concentrated around this level. 

This activity suggests that the $130 area is acting as a key resistance point in the market, reinforced by substantial delta and gamma positioning in call options at this strike price. As implied volatility levels are currently high, these options hedging flows are helping to support the stock around the $130 mark.

However, the situation could change dramatically post-earnings. The market is pricing in a significant move, with an expected swing of around 9%. Once NVIDIA releases its results, implied volatility is likely to drop sharply, historically almost halving after such events. This drop in volatility would lead to a substantial decrease in the value of both puts and calls, especially those around the $130 level. As a result, the delta and gamma levels that currently provide support could diminish, reducing the hedging flows that are propping up the stock at this critical price point.

If NVIDIA's stock doesn't rise significantly beyond $137 following the earnings release, the $130 calls could lose a considerable amount of value, potentially triggering a wave of selling as hedging flows are unwound. 

This dynamic was evident in the last quarter, where the stock was saved by a 10-for-1 stock split, which provided the momentum needed to push the stock higher. This time around, without such a catalyst, the $130 level will be a crucial battleground, and the stock's movement relative to this level will likely influence post-earnings market sentiment and volatility.

Should I Buy NVDA?

The short answer is "Yes". This is THE stock in THE hottest space (AI Hardware). It holds 98% of the GPU market. It will inevitably lose this share and see gross margins impacted. However, the pie continues to grow and revenue growth will continue to impress. 

Valuations will remain a question mark but the company continues to print money as we presented in this preview. This will allow NVDA to reduce share count and use financial engineering to improve its valuation. There is the potential for a dividend, but we would think that NVDA would be better served using its cash to shore up its supply chain.

While there is still opportunity for long term investors, those with a lower risk tolerance would be better served to let the NVDA earnings report play out before trying to jump into the stock. Investors run the risk of missing out another blow out quarter. But we would be a little cautious given the high expectations and valuation. The uncertainty around the options positioning is an added layer of uncertainty.

We would prefer to allow the NVDA earnings to play out and wait for an opportunity to buy a pullback. We are not concerned about the company or the stock over a longer period, however, the potential for a sell the news reaction given the valuation, expectations, and positioning give us pause about buying ahead of the news.