Understanding Nvidia’s Stock Performance Amidst High Earnings
- Nvidia’s robust earnings report on Thursday did not stop the company’s shares from slumping. However, the AI chipmaker still projects strong growth for this year.
- Investors have expressed concerns about the sustainability of the AI infrastructure spending that has boosted Nvidia’s growth. Worries about the AI industry in general are also negatively affecting tech stocks.
Nvidia’s increasing revenue and strong margins haven’t prevented its stock from declining. So, what’s going on?
On Wednesday, Nvidia exceeded fourth-quarter earnings expectations and predicted that revenue growth would pick up pace in the current quarter. In response, Wall Street analysts revised their earnings estimates upwards.
Nvidia’s Stock Performance
Despite these positive projections, Nvidia’s (NVDA) shares fell by over 5% on Thursday, erasing all of its gains for the year and putting it more than 10% below its all-time high from October.
Why This Stock Performance Matters
Nvidia’s stocks have contributed significantly to the overall stock market’s returns in recent years. However, despite its thriving business, the company’s stocks have lost momentum in recent months. This illustrates the uncertainty that hangs over even the most promising AI investments.
For most of the past three years, Nvidia’s stocks soared in tandem with the chipmaker’s profits. Then, a shift occurred. Despite earnings estimates rising by almost 40%, the company’s stocks remained stagnant in the five months leading up to Wednesday’s earnings report.
Nvidia’s Valuation Compared to Tech Peers
Nvidia’s stock traded at a significant discount compared to its historical performance and other tech stocks leading up to Wednesday’s earnings report. However, despite the company’s low price/earnings-to-growth ratio (PEG), investors are not rushing to buy.
Goldman identifies this disconnect between Nvidia’s earnings and stock price as an example of the perceived ‘over-earnings’ dilemma.
There is a concern that Nvidia’s dominant market position could be threatened, leading to decreased demand and increasing competition. As these fears grow, investors are willing to pay less for each dollar of profit, putting pressure on Nvidia’s multiples.
Morgan Stanley analysts justify the stock’s low multiple, citing the company’s large market cap and high profitability. They suggest Nvidia shares are running up against the Law of Large Numbers, which states that growth is more difficult to sustain as a company grows larger.
Is Pessimism Over Nvidia’s Shares Justified?
According to Morgan Stanley, the pessimism surrounding Nvidia shares is not entirely justified. Despite apparent concerns about slowing growth, there is evidence that corporate, consumer, and governmental use of AI is on the rise.
Expected Market Reaction to Nvidia Stocks
Some experts believe that the market will eventually favor Nvidia stocks again. “At the end of the day, it is hard to see how the stock continues to languish,” wrote Timothy Arcuri from UBS, who expects earnings growth to increase in the second half of the year.
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