Nvidia’s valuation remains precarious despite Strong earnings

Nvidia is a key supplier of AI data center infrastructure, including accelerators, networking equipment, and CUDA software. The company’s fiscal second-quarter revenue reached $96.22 billion, a 105.8% increase, with Data Center sales surging 117% to $89.02 billion. Despite this robust performance, the stock has experienced a recent 21.4% decline amid broader chip sector selling.

Analysts’ earnings estimates for Nvidia continue to climb, with the consensus for fiscal 2028 EPS now at $15.9146, up from $12.8148 just 90 days ago. Management anticipates revenue growth of approximately 70% in fiscal 2028, citing supply constraints due to customer demand growing at roughly 100%. Vera Rubin forecasts revenue per gigawatt to reach $40 billion, a significant increase from the previous $25 billion estimate. Nvidia has also consistently exceeded EPS and revenue estimates for six consecutive quarters and has $99 billion remaining in its buyback authorization.

However, Nvidia’s valuation is heavily reliant on sustained high levels of AI infrastructure spending from major tech companies like Microsoft, Alphabet, Amazon, Meta, and Oracle. A 30% decrease in expected earnings would raise the forward P/E ratio to approximately 18, and a 40% reduction would push it to around 21. Even the lowest fiscal 2028 estimate of $12.8484 implies a valuation of roughly 15 times earnings.

Concerns are also emerging regarding Nvidia’s financial commitments, with supply commitments totaling $279 billion and guarantee obligations reaching $108.5 billion. Days sales outstanding have also increased from 45 to 60 days. The company has invested nearly $50 billion in frontier AI labs, a practice CEO Jensen Huang has acknowledged is a form of “circular financing.” Gross margins are expected to reach a low of 71% to 72% in the fiscal fourth quarter, and the outlook excludes revenue from China data center compute. Microsoft’s recent decision to discontinue an Oracle cloud arrangement based on older Nvidia chips highlights the rapid pace of technological change.

The upcoming fiscal third-quarter earnings report will be crucial in assessing the company’s trajectory. Investors will be scrutinizing revenue against guidance of $108.0 billion, gross margin against the expected 74.0% floor, and whether management reaffirms its fiscal 2028 growth target.

Currently, the average analyst target price of $327.14 suggests a potential 75% upside from the current price of $186.64. Among the 62 analysts covering the stock, 10 rate it as a Strong Buy, 49 as a Buy, 2 as a Hold, and 1 as a Sell. Nvidia’s stock is up 0.31% year-to-date, while the S&P 500 has gained 7.83%, and over the past year, Nvidia is down 0.53% compared to the index’s 9.69% gain. Its beta of 2.247 indicates a tendency for the stock to be more volatile than the broader market.

Ultimately, Nvidia’s valuation remains dependent on the durability of current earnings forecasts. Investors should focus on three key indicators in the upcoming earnings report: revenue exceeding guidance, gross margin tracking towards the projected floor, and a stabilization or decrease in days sales outstanding. A positive report could quickly reverse the recent decline, but a shortfall could exacerbate concerns about the company’s reliance on borrowed AI capital.