Too Much Hype! Should You Sell NVIDIA Stock Ahead of Q2 Earnings?

The upcoming earnings release for NVIDIA Corporation NVDA for the second quarter of fiscal 2026 has attracted significant attention, primarily due to the widespread euphoria surrounding artificial intelligence (AI) and the demand for graphics processing units (GPUs). This enthusiasm has contributed to a sharp rise in NVIDIA’s valuation despite intense competition and geopolitical uncertainties, prompting questions about the wisdom of selling NVIDIA shares before the earnings announcement. 

Many investors feel that NVIDIA’s stock is overvalued. So, any earnings shortfall may lead to a drop in share price. Conversely, others argue that the company’s substantial growth potential in AI makes it unwise to take profits. Let’s analyze –  

Bearish Outlook on NVIDIA Before Q2 Earnings Release 

The advancement of AI helped NVIDIA surpass $4 trillion in under three years. However, despite consistent demand for AI software and data center infrastructure, many companies struggle to utilize AI solutions effectively, and numerous firms have not seen positive returns from their investments in AI. So, even a minor setback surrounding AI can upset NVIDIA’s growth narrative ahead of its much-awaited fiscal second-quarter earnings. 

The significant increase in spending on data centers could enhance NVIDIA’s performance in the fiscal second quarter. Still, there are concerns regarding the practicality of existing AI models. Running and training generative AI is costly, and the business model hasn’t proven to be profitable. So, if companies such as Anthropic, Cohere and OpenAI, to name a few, encounter difficulties, the long-term demand for NVIDIA’s chips may decline. 

NVIDIA’s extremely high valuation is another worry. The Jensen Huang-led company’s forward price-to-sales (P/S) ratio stands at 21.96 compared to 2.09 for the peer group. Thus, market expectations are quite elevated, and if growth in the fiscal second quarter decelerates, the stock could potentially experience a sharp decline. 

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NVIDIA’s revenues in the fiscal first quarter were $44.1 billion, up 69% year over year. However, the company expects revenues to reach $45 billion in the fiscal second quarter, up around 50% year over year. 

Over time, NVIDIA’s ongoing operations in China may face regulatory obstacles from the U.S. government, leading to greater uncertainty and posing a threat to revenue stability. Additionally, as NVIDIA's competitors, such as Advanced Micro Devices, Inc. AMD and others, continue to grow, the company’s leading position in the AI market may weaken, its pricing power could decrease, and its profit margins may come under pressure. 

Reasons to Hold NVIDIA Stock Instead of Taking Profits Now 

Competition in the GPUs space, extreme valuation, and slower-than-expected AI adoption are some of the reasons to be skeptical about NVIDIA. However, the company is still well-positioned to deliver growth in the fiscal second quarter since its trailing four-quarter earnings surprise, on average, is a positive 3.9%.   

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The rise in demand for NVIDIA’s Blackwell Ultra GB300 GPU will enhance the company’s fiscal second-quarter revenues and profits. Additionally, NVIDIA’s chip sales to China may recover losses from restrictions, potentially boosting revenues and performance in the upcoming quarter. NVIDIA anticipates $8 billion in chip sales to China in the quarter.  

Furthermore, NVIDIA benefits from rising data center capital expenditure (capex), with major companies like Alphabet Inc. GOOGL, Meta Platforms, Inc. META, Amazon.com, Inc. AMZN, and Microsoft Corporation MSFT increasing their forecasts. Also, the rapidly expanding networking hardware division of NVIDIA will boost revenues, and the CUDA platform provides the company with a wide moat, potentially safeguarding the company’s market share over the long term. 

Therefore, it would be unwise for investors to sell their shares; instead, it is prudent to retain NVIDIA stock for long-term advantages. For now, NVIDIA has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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