Nvidia Beat Earnings Estimates Again (15 Times Straight). History Says the Stock Will Do This Next.

Nvidia (NASDAQ: NVDA) on Aug. 26 reported strong financial results for the second quarter of fiscal 2027, which ended in July. Revenue increased 106% and adjusted earnings increased 120%, driven by robust demand for artificial intelligence (AI) infrastructure.

Wall Street had been looking for 87% revenue growth and 108% adjusted earnings growth, meaning Nvidia once again beat estimates on the top and bottom lines. History says this will happen next.

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History says Nvidia stock could drop 7% by late September

Nvidia has consistently reported strong financial results since the artificial intelligence boom began in 2023. In fact, the company has now beaten consensus earnings estimates in 15 consecutive quarters, but investors have gradually become desensitized to sensational numbers.

For instance, the stock advanced 29% and 38% over the month following earnings beats in Q4 2023 (ended January 2023) and Q1 2024 (ended April 2023), respectively. But the stock actually fell by an average of 4% during the month following each of the last eight quarterly earnings beats.

What does that imply about the future? Nvidia stock closed at $210 per share ahead of the latest earnings report on Aug. 26. The price has since increased 4% to $217 per share. But if its performance matches the historical average, it will decline about 7% to $202 per share (i.e., 4% below the pre-earnings price) by late September.

Of course, that historical pattern is superficial, and past performance is never a guarantee of future results. How Nvidia stock actually performs in the coming month depends entirely on investor sentiment.

Nvidia stock looks more attractive today than it has since the AI boom started

The investment thesis for Nvidia has not changed. The company not only dominates the AI accelerator market, but also enjoys a strong competitive position in networking and central processing units (CPUs). That full-stack strategy, coupled with an unrivaled ecosystem of software tools, has made Nvidia the industry standard in AI infrastructure.

Nvidia trades at 27 times earnings, nearly the lowest valuation since the AI boom began in 2023. That multiple looks particularly cheap because Wall Street expects the company's earnings to grow at 50% annually over the next three years. Those numbers give a price-to-earnings-to-growth (PEG) ratio of 0.54, and stocks trading below 1 are typically considered undervalued.

Why is Nvidia stock so cheap? Some, if not many, investors question the sustainability of the AI capex (capital expenditure) boom. Central to the bear thesis is anxiety about circular financing deals. Nvidia has invested billions of dollars in AI companies like OpenAI, CoreWeave, and Space Exploration Technologies, which have turned around and used that cash to purchase Nvidia chips.

Bears also argue that hyperscalers are depreciating Nvidia chips too slowly. Several experts (including famous investor Michael Burry) estimate the useful life of Nvidia silicon at two to three years, but hyperscalers have been depreciating the chips over four to six years. If they are overestimating, those companies have artificially inflated their earnings in recent quarters.

On that point, bulls have a rebuttal. Recent evidence suggests hyperscalers may have actually underestimated the useful life of AI chips. Neocloud CoreWeave recently signed a contract to rent Nvidia A100 GPUs (which were introduced in 2020) through 2029, implying that the useful life of Nvidia silicon may be closer to nine years.

Wall Street analysts think Nvidia stock is undervalued

Circular financing deals certainly raise yellow flags, but they are not necessarily a problem if Nvidia is merely bridging the gap between supply and demand. In other words, so long as end-user demand for AI materializes across the consumer and enterprise spaces, it makes sense for Nvidia to help AI companies overcome capital constraints.

And investors have reason to believe that demand is materializing. Strategists at JPMorgan Chase argue that consumers are adopting AI faster than any other modern technology, including computers, the internet, social media, and smartphones. Additionally, about one in four U.S. firms have deployed AI, making it one of the fastest-growing enterprise technologies in history.

In that context, Nvidia looks like a compelling long-term investment at its current valuation. And Wall Street agrees. Among 69 analysts, Nvidia has a median 12-month target price of $318 per share. That implies 46% upside from its current share price of $217. Investors with a five-year time horizon should feel comfortable buying a small position today.

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