Nvidia earnings: Can AI hype override valuation worries? – Stock Market News
May 17, 2023 2:28 pm
Nvidia, the world’s leading graphics card designer will release its latest earnings report on Wednesday May 24, after the closing bell. The company’s shares have gone on an absolute rampage this year, gaining 104% on expectations it will dominate the AI revolution. Alas, the valuation has also reached the stratosphere as most of the good news has been priced in, leaving little room for error when Nvidia reports its results.
Melt-up
The recent rally in Nvidia shares has been stunning. With AI models such as ChatGPT bursting into the scene and capturing the public imagination, investors are betting heavily that the next technological revolution will be powered by Nvidia graphics cards.
Industries such as education, healthcare, logistics, finance and many more are likely to be disrupted by the dramatic rise of artificial intelligence. Hence, Nvidia is seen as the obvious bet for investors to gain exposure to this innovative trend, which can fuel tremendous growth for chip demand.
While the future is certainly promising, the ‘problem’ is that the AI transformation is still in its early stages. It might take years before it translates into a massive boost in sales and profits. In the here and now, the company has to grapple with a slowdown in gaming and data center demand, which are its bread and butter.
Inventory levels have been rising steadily for several quarters, which suggests that demand for its products has started to dwindle and lower prices might be needed to attract customers. It’s a classic case of oversupply after severe pandemic shortages, and the buzz around AI has masked these issues.
Earnings contraction, but focus on guidance
In the first quarter of 2023, analysts expect Nvidia to report $0.92 in earnings per share on $6.5 billion in revenue. These numbers would represent an earnings decline of 32% and a revenue reduction of 21% from the same quarter last year.
Of course, investors are already fully aware that the company is facing a difficult period, but are willing to forgive that for the promise of stronger numbers ahead. Therefore, the lion’s share of attention will fall on the guidance by company executives for the second quarter and beyond.
Analyst estimates point to an aggressive recovery in earnings growth during the rest of the year, so if management reaffirms or upgrades that outlook, it could eclipse everything else.
Turning to the technical chart, a batch of surprisingly strong earnings or cheerful guidance could propel Nvidia shares towards 304.00, which is the next resistance zone after 292.00 was breached.
On the flipside, if investors are left disappointed by this earnings report, the first area to provide support might be around 280.00, where a violation would turn the focus to 263.00.
Valuation leaves no room for error
The Achilles heel of Nvidia shares is valuation. The stock is trading at 59 times what analysts think earnings will be over the next year, which seems excessive even for a company with such rosy growth prospects.
In other words, exponential profit growth has already been baked into the cake, leaving the stock in a vulnerable position if reality falls even a little short of expectations. For Nvidia shares to keep on rising, the company would have to exceed a bar that is already set very high.
All told, Nvidia has evolved into a best-in-class company in the field of graphics cards and surely has a bright future ahead of it. Sadly the valuation already reflects this optimism, making it difficult to find the stock attractive from an investment perspective at this stage.
Nvidia, the world’s leading graphics card designer will release its latest earnings report on Wednesday May 24, after the closing bell. The company’s shares have gone on an absolute rampage this year, gaining 104% on expectations it will dominate the AI revolution. Alas, the valuation has also reached the stratosphere as most of the good news has been priced in, leaving little room for error when Nvidia reports its results.
Melt-up
The recent rally in Nvidia shares has been stunning. With AI models such as ChatGPT bursting into the scene and capturing the public imagination, investors are betting heavily that the next technological revolution will be powered by Nvidia graphics cards.
Industries such as education, healthcare, logistics, finance and many more are likely to be disrupted by the dramatic rise of artificial intelligence. Hence, Nvidia is seen as the obvious bet for investors to gain exposure to this innovative trend, which can fuel tremendous growth for chip demand.
While the future is certainly promising, the ‘problem’ is that the AI transformation is still in its early stages. It might take years before it translates into a massive boost in sales and profits. In the here and now, the company has to grapple with a slowdown in gaming and data center demand, which are its bread and butter.
Inventory levels have been rising steadily for several quarters, which suggests that demand for its products has started to dwindle and lower prices might be needed to attract customers. It’s a classic case of oversupply after severe pandemic shortages, and the buzz around AI has masked these issues.
Earnings contraction, but focus on guidance
In the first quarter of 2023, analysts expect Nvidia to report $0.92 in earnings per share on $6.5 billion in revenue. These numbers would represent an earnings decline of 32% and a revenue reduction of 21% from the same quarter last year.
Of course, investors are already fully aware that the company is facing a difficult period, but are willing to forgive that for the promise of stronger numbers ahead. Therefore, the lion’s share of attention will fall on the guidance by company executives for the second quarter and beyond.
Analyst estimates point to an aggressive recovery in earnings growth during the rest of the year, so if management reaffirms or upgrades that outlook, it could eclipse everything else.
On the flipside, if investors are left disappointed by this earnings report, the first area to provide support might be around 280.00, where a violation would turn the focus to 263.00.
Valuation leaves no room for error
The Achilles heel of Nvidia shares is valuation. The stock is trading at 59 times what analysts think earnings will be over the next year, which seems excessive even for a company with such rosy growth prospects.
In other words, exponential profit growth has already been baked into the cake, leaving the stock in a vulnerable position if reality falls even a little short of expectations. For Nvidia shares to keep on rising, the company would have to exceed a bar that is already set very high.
All told, Nvidia has evolved into a best-in-class company in the field of graphics cards and surely has a bright future ahead of it. Sadly the valuation already reflects this optimism, making it difficult to find the stock attractive from an investment perspective at this stage.
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