Nvidia Stock Is a Screaming Buy Before Aug. 26, According to Wall Street

Nvidia (NASDAQ: NVDA) will announce second-quarter financial results at 5:00 p.m. ET on Aug. 26, and the entire stock market could rise or fall on the news. That's partly because Nvidia accounts for 8% of the S&P 500 (SNPINDEX: ^GSPC), but also because investors see the chipmaker as a barometer of the artificial intelligence boom.

Wall Street is predominantly bullish ahead of the report. The consensus earnings estimate has been revised higher in the past month, and most analysts consider Nvidia deeply undervalued. The stock has a median 12-month target price of $300 per share. That implies 44% upside from the current share price of $208.

Here's what investors should know.

Image source: Getty Images.

Wall Street expects strong financial results from Nvidia

Nvidia reported encouraging first-quarter financial results. Revenue increased 85% to $81.6 billion, driven by relentless demand for data center compute and networking products, and non-GAAP net income increased 140% to $1.87 per diluted share. Management also provided strong guidance implying 95% revenue growth in the second quarter.

However, Wall Street has bigger expectations. The consensus estimate currently says Nvidia's revenue will increase 97% to $92.1 billion and non-GAAP net income will increase 99% to $2.09 per diluted share. The stock will not necessarily rise if the company beats expectations, but it could drop sharply (alongside the broader stock market) if its financial results fall short of what analysts anticipate.

Nvidia dominates the AI infrastructure market

Nvidia dominates the artificial intelligence infrastructure market. Its graphics processing units (GPUs) are the most popular type of artificial intelligence accelerator, with 80% to 90% market share. Nvidia is also the largest networking business in the world, and the company is on pace to be the largest central processing unit (CPU) supplier this year.

To further quantify Nvidia's dominance, consider these facts:

• George Lee at Goldman Sachs estimates Nvidia accounts for 75% of data center capital expenditures (capex) related to artificial intelligence compute. He also expects AI compute capex to hit $1 trillion in 2030. If Nvidia maintains its market share, that revenue stream could hit $750 billion by the end of the decade, implying 34% annual growth.
• Meera Pandit at JPMorgan Chase estimates that 26% of hyperscaler capex goes directly to Nvidia's bottom line. She expects total capex spending (i.e., compute, power, and property) from the five largest hyperscalers to reach $1.1 trillion in 2027. So, those five companies could account for $260 million in net income next year if Nvidia maintains its market share.

Wall Street analysts generally expect Nvidia to maintain its dominance in AI infrastructure despite intensifying competition. The company's ability to optimize across the AI hardware stack enables it to optimize systems for performance and power efficiency in ways competitors cannot.

Nvidia not only develops the fastest training systems but also has the lowest inference costs, CFO Colette Kress recently told analysts. She also noted that the company has consistently achieved top results at the MLPerf benchmarks, a series of objective tests regarded as the industry standard in measuring AI systems across training and inference workloads.

Nvidia systems not only offer the best performance of any AI infrastructure on the market, but they are also the most economic and financeable solution, Kress explained. "The right economic metric is not the purchase price of the GPU. It is the lifetime cost of an AI factory producing intelligence." No matter how that's measured, Nvidia excels.

Beyond superior hardware, Nvidia's CUDA software is the industry standard in AI development, powering about 90% of enterprise AI applications. No other company has a comparable ecosystem of code libraries, and even if they did, moving those applications to alternative data center accelerators like Alphabet's Tensor Processing Units (TPUs) would be expensive and time-consuming.

With that in mind, Wall Street expects Nvidia's adjusted earnings to grow at 58% annually through the fiscal year ending in January 2028. That makes the current valuation of 37 times earnings look downright cheap. Patient investors should feel comfortable buying a small position in Nvidia stock today, but I would hold some money in reserve to capitalize on any pullback following the company's financial report this week.

JPMorgan Chase is an advertising partner of Motley Fool Money. Trevor Jennewine has positions in Nvidia. The Motley Fool has positions in and recommends Alphabet, Goldman Sachs Group, JPMorgan Chase, and Nvidia. The Motley Fool has a disclosure policy.