Nvidia (NASDAQ: NVDA) is all set to release its fiscal 2025 second-quarter results (for the three months ended July 28) on Aug. 28, and analysts expect another quarter of outstanding growth from the company.

More specifically, LSEG Data & Analytics is forecasting Nvidia’s revenue to increase by 112% on a year-over-year basis to $28.6 billion. That’s slightly higher than the midpoint of Nvidia’s revenue guidance range of $28 billion for Q2. However, LSEG data indicates that Nvidia’s adjusted gross margin may have dropped from fiscal Q1 due to the company’s investments in ramping up production capacity.

If that’s accurate, Nvidia’s gross margin would fall below its guidance of 75.5% for fiscal Q2. Now, a slip by Nvidia in its quarterly performance or the accompanying guidance could send its shares tumbling. If that’s indeed the case, it may be a good idea for savvy investors to buy this semiconductor bellwether.

However, the possibility of Nvidia’s results and guidance exceeding expectations cannot be ruled out. In this article, we will examine three reasons why investors should consider buying Nvidia stock before its upcoming results.

1. An attractive valuation makes the stock worth buying right now

Nvidia’s expensive valuation has been a cause for concern in recent months, which is not surprising considering the stunning surge the stock has enjoyed since the end of 2022. However, a closer look at the stock’s multiples will make it clear that investors are getting a good deal on this high-flying chipmaker right before its earnings report.

Nvidia currently trades at 48 times forward earnings. For comparison, the U.S. technology sector currently has an average earnings multiple of 46. Meanwhile, the stock’s price/earnings-to-growth ratio (PEG ratio) provides an even better gauge of how attractively valued Nvidia is right now. That’s because the PEG ratio is a forward-looking valuation metric calculated by dividing a stock’s trailing P/E ratio by the estimated earnings growth that it could deliver.

A PEG ratio of less than 1 indicates that a stock is undervalued. By that measure, Nvidia stock seems extremely undervalued with respect to the earnings growth that it is likely to deliver.

NVDA PEG Ratio data by YCharts

As such, Nvidia is still a solid bet for investors looking to add a growth stock to their portfolios right now, especially considering that there are indications that it could deliver better-than-expected results.

2. These AI hardware companies indicate that Nvidia is poised to deliver solid results

The earnings season is about to end, which means that we can get a fair idea about the health of the AI hardware market based on results from other companies in this ecosystem.

For instance, Nvidia’s foundry partner Taiwan Semiconductor Manufacturing (NYSE: TSM), popularly known as TSMC, saw its top line jump 33% year over year in the second quarter of 2024 (which coincided with two months of Nvidia’s fiscal Q2). That was a significant jump from the 13% year-over-year jump in revenue that TSMC delivered in the first quarter of the year. It is also worth noting that TSMC’s July revenue increased 45% year over year, outpacing the growth it has witnessed in the first two quarters of the year.

TSMC has been working hard in recent months to increase its packaging capacity of advanced chips that are used to manufacture AI chips for Nvidia. So, the surge in TSMC’s quarterly revenue growth provides strong evidence of robust growth in Nvidia’s revenue and earnings, especially because Nvidia is TSMC’s second-largest customer.

However, TSMC isn’t the only AI hardware player that has seen a significant surge in revenue recently. Super Micro Computer (NASDAQ: SMCI), which manufactures AI server solutions used for mounting chips from chipmakers such as Nvidia, reported 143% year-over-year revenue growth in the fourth quarter of fiscal 2024 (which ended on June 30).

Supermicro attributed its phenomenal growth to the “strong demand for next generation air-cooled and direct liquid-cooled (DLC) rack-scale AI GPU platforms.” What’s more, the midpoint of Supermicro’s revenue guidance for the current quarter stands at $6.5 billion, which would be a 216% increase from the same quarter last year.

Again, this is an indication that Nvidia could be ramping up the production of its next-generation Blackwell chips, which the company had promised would arrive later in 2024. Nvidia, therefore, could not only deliver results that may outpace Wall Street’s expectations, but its guidance could also turn out to be solid and help the stock sustain its stunning rally.

3. Big tech’s capex surge is good news for Nvidia investors

Technology titans such as Microsoft, Meta Platforms, Alphabet, and Amazon have been ramping up their capital expenditures (capex) to bolster their AI infrastructure. For instance, Microsoft’s fiscal 2024 capital spending rose 75% from the previous year to almost $56 billion. The company expects to raise its capex once again in the current fiscal year to spend money on building more AI services so that it can position itself for long-term growth.

Alphabet, on the other hand, could end the year with capex of around $50 billion as it intends to keep pouring money into servers and data centers. That would be a major increase over last year’s capex of $32 billion. Even Meta raised its 2024 capital expenditure guidance to a range of $37 billion to $40 billion, up from the prior range of $35 billion to $40 billion. The social media giant’s 2023 capex stood at $28 billion, and it expects its capital spending to continue rising into 2025.

Investors should note that all of these companies have been Nvidia’s customers, purchasing the company’s chips to train and deploy AI models. Even better, they are set to adopt the chipmaker’s next-generation Blackwell processors as well, and Nvidia expects that the demand for these new chips will outpace supply well into 2025. This potential spending could carry the company for quarters and even years to come.

In all, there is enough evidence that the demand for Nvidia’s AI chips continues to remain healthy, allowing it to deliver results that could exceed consensus estimates and guide above expectations. If that happens, shares of Nvidia could get another shot in the arm, which is why it may be a good idea for long-term-minded investors to buy this AI stock before it potentially soars further after Aug. 28.

The post 3 Reasons to Buy Nvidia Stock Before August 28 appeared first on The Motley Fool Canada.

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Fool contributor Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool recommends Alphabet, Amazon, Meta Platforms, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.

The Nasdaq Composite index has been in impressive form over the past year with gains of more than 18% thanks to the healthy rally in technology stocks that have benefited from catalysts such as artificial intelligence (AI), but the index has witnessed a pullback of late.

The Nasdaq Composite index is down over 10% in the past month as the market seems to be having doubts about AI’s ability to drive substantial growth for big tech companies. Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) is a casualty of this sell-off; its shares are trading down 12.5% since July 23 when it posted results that comfortably exceeded Wall Street’s expectations.

This could be an opportunity for investors to buy a top AI stock at an attractive valuation. Let’s look at the reasons why.

AI is accelerating Alphabet’s growth

Alphabet released its second-quarter 2024 results on July 23. The tech giant’s revenue increased 15% year over year in constant currency terms to $84.7 billion, which was a nice improvement over the 9% growth it reported in the same period last year. Alphabet’s adjusted earnings increased 31% year over year to $1.89 per share, driven by an increase of three percentage points in its operating margin.

Analysts were expecting Alphabet to deliver $1.85 per share in earnings on $84.2 billion in revenue, but it looks like the company’s aggressive capital spending has got investors worried. Alphabet’s capital spending increased from $6.9 billion in the same period last year to $13.2 billion last quarter, exceeding the $12.2 billion consensus estimate by a big margin.

Management points out that it expects to continue increasing its capital investments in 2024 to “support the growth of our business and our long-term initiatives, in particular in support of AI products and services.” It looks like investors wanted to see much stronger growth from Alphabet considering its aggressive capital investments to capitalize on the AI market’s growth. However, a closer look at some of the growth trends from Alphabet’s latest quarterly report indicates that the company is indeed benefiting from the proliferation of AI.

For instance, the company’s revenue from the Google Cloud business increased almost 29% year over year to $10.35 billion. Market research firm Canalys estimates that global spending on cloud infrastructure could increase by 20% in 2024. Alphabet, however, is recording faster growth in this segment. Google Cloud revenue was up 28% in the first quarter of 2024, and the company witnessed a slight uptick in this segment in Q2.

This strong showing by the Google Cloud business is not surprising, since the company’s AI infrastructure and large language models (LLMs) are gaining healthy traction among customers. This bodes well for Alphabet, as the demand for cloud-based AI infrastructure and services is expected to become a $397 billion market in 2030 as compared to $60 billion last year.

More importantly, Google Cloud revenue is growing at a faster pace than Alphabet’s overall revenue. So, the huge opportunity in the cloud AI market could eventually accelerate the company’s growth in the long run as Google Cloud starts moving the needle in a bigger way for this “Magnificent Seven” stock.

At the same time, Alphabet’s focus on integrating AI tools within its advertising business is also reaping rewards for the company. Its Google Advertising revenue was up 11% year over year in the previous quarter, a trend that’s likely to continue with the help of AI. Alphabet management pointed out on the latest earnings conference call that advertisers using its AI tools are witnessing an improvement in the quality of ad views and are benefiting from an improvement in conversion rates and profitability.

Not surprisingly, Alphabet has been aggressively rolling out AI-focused features for advertisers, delivering 30 such features in the previous quarter alone. Alphabet is doing the right thing by investing in AI-driven advertising features, since more than 90% of advertising is expected to be AI-enabled by 2029. So investors would do well to focus on the bigger picture because Alphabet could eventually clock faster growth in the long run, and AI is set to play a key role in driving the same.

The valuation makes buying Alphabet stock a no-brainer

We have seen that Alphabet delivered impressive bottom-line growth last quarter. The good part is that analysts expect its earnings to increase 32% in 2024 to $7.65 per share from $5.80 per share in 2023. More importantly, as the following chart shows, analysts raised their earnings growth expectations for Alphabet recently.

GOOG EPS Estimates for Current Fiscal Year data by YCharts

Alphabet stock currently trades at 24 times trailing earnings. That’s a discount to the Nasdaq-100‘s earnings multiple of 31. Investors, therefore, are getting a good deal on this AI stock following its latest drop, and they should consider grabbing this buying opportunity, as it seems capable of delivering long-term gains.

The post 1 No-Brainer Artificial Intelligence (AI) Stock to Buy Following the Nasdaq’s Recent Drop appeared first on The Motley Fool Canada.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Fool contributor Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool recommends Alphabet. The Motley Fool has a disclosure policy.