What the heck? Where’s the panic? Where’s the massive selloff…?
If you’d told me yesterday that Nvidia (NASDAQ: NVDA) was going to offer up weak guidance last night and then sell off $5 bucks today, I’d have had flashbacks to August 5, when the Dow was down over 1,200 points…
But investors are taking the decline for Nvidia in stride.
As much as the talking heads would like to convince everyone that Nvidia is the most important company in the world, it really isn’t. It doesn’t put food on the table, it doesn’t power your car, it doesn’t build homes, it doesn’t protect U.S. interests…
It’s almost as if the market is acting rationally! (Don’t worry, that won’t last…)
But seriously though — there are times when investment decisions are easy. This is one of them.
We’ll look at some numbers in a minute, but all you really need to know is that Nvidia’s hyper-growth days are over. The company may remain the best chip stock out there, but it isn’t going to post triple-digit earnings growth anymore.
Normally, when growth stocks stop growing the way investors expect, the share price gets knocked down, sometimes substantially. Note that the recent correction that climaxed on August 5 took Nvidia down to $90 a share…
We’ll discuss what may be ahead for Nvidia’s share price at the end of this article. But first I want to show you why I say that Nvidia’s growth will never be the growth stick it was.
The End of an Era
Last night, Nvidia reported $30 billion in revenue and $0.68 a share in earnings. Analysts had been expecting $28.7 billion in revenue and $0.64 in per-share earnings.
Yes, that’s a beat. A double-beat in fact because both the top and bottom lines were better than expected. That’s pretty good for most companies…
Nvidia isn’t most companies. Nvidia is the company. It leads the AI charge…it is the most magnificent of the 7…it is worth $3 trillion dollars…
The stock recently rallied 40% from the August 5 low three weeks ago. Investors are Bullish with a capital B. One analyst thought Nvidia would report $37 billion instead of $30 billion – that’s how out-of-whack expectations have become.
Anyway, Nvidia just beat revenue estimates by 4% and earnings by 6%.
That is…ok?
For comparisons sake, Target just reported $2.57 a share in earnings vs expectations of $2.18. That’s an 18% beat. From Target, worth $74 billion dollars.
For the current quarter, which ends September 30, Nvidia said it would take in $32.5 billion in revenue. Analysts were expecting $31.7 billion. Current quarter revenue guidance was raised by…2.5%.
When calendar year 2024 is over, Nvidia will still have doubled earnings per share (after growing EPS 208% in calendar 2023). Next year, earnings are expected to grow 39%. Then 17% growth for calendar 2026 and 15% in calendar year 2027.
Analysts Play Catch-Up
The point to all of this: analysts have now finally gotten a handle on Nvidia’s business. In part because they have a handle on what Nvidia’s customers (Microsoft, Meta, etc) are spending. And also because they have a handle on data center construction.
The takeaway is that there aren’t going to be any more wild surprises from Nvidia anymore. Fending off competition and protecting its margins will be critical. Protecting its share price with buybacks (like the $50 billion buyback it announced yesterday) and higher dividend will also become priorities.
How big do share buybacks and dividends have to be to protect a $3 trillion dollar valuation? Good question…
Here’s another good question: is it time for investors to start focusing on other aspects of the AI story?
We are currently still in the infrastructure phase – the data center buildouts and all that. Nvidia was the star of the infrastructure phase. But the infrastructure phase has become largely a known quantity.
We’ve talked a lot about the power needs for AI. A stagnant Nvidia is likely to draw more investors to the power stocks we’ve featured.
It could also be time to move down the AI value chain to the applications that are supposed monetize all the infrastructure spending. Companies like C3.ai (NASDAQ: AI), Soundhound (NASDAQ: SOUN), Shrodinger (NASDAQ: SDGR), along with more well known companies like Palantir (NASDAQ: PLTR).
Hammer and I will be talking about this.
Cheers,
Briton Ryle
Chief Investment Strategist
Outsider Club
X/Twitter: https://twitter.com/BritonRyle
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