What Happened:
Shares of leading designer of graphics chips Nvidia (NASDAQ:NVDA) fell 10% in the afternoon session after major indices declined with the Nasdaq down 2.1% while the S&P 500 fell by 0.9%. Netflix reported mixed results to kick off the new earnings season. The video-streaming giant provided underwhelming sales guidance for the full year and guided for growth to decelerate in the second half of the year. Also, Netflix surprisingly announced it will stop disclosing subscriber count (starting in the first quarter of 2025), and this is contributing to the market’s concerns about the business. The company’s post-earnings stock decline is likely dampening the sentiment toward tech stocks.
It was a challenging week for most risk assets following news of escalating tension between Israel and Iran, which is raising concerns among investors, given the potential disruptions to business supply chains, especially in the Middle East. These add to the ongoing inflation worries after the March 2024 CPI (Consumer Price Index – a gauge of the average price consumers pay for goods and services) report revealed inflation came in slightly hotter than expected. On April 16, 2024, Fed Chair Jerome Powell echoed similar sentiment, adding, “The recent data have clearly not given us greater confidence and instead indicate that it’s likely to take longer than expected to achieve that confidence.” This suggests the Fed might not lower its policy rates as fast as anticipated in 2024, with markets pricing in fewer rate cuts for the year.
As a reminder, the driver of a stock’s value is the sum of its future cash flows discounted back to today. With lower interest rates, investors can apply higher valuations to their stocks. No wonder so many in the investment community are optimistic about 2024. We at StockStory remain cautious, as following the crowd can lead to adverse outcomes. During times like this, it’s best to own high-quality, cash-flowing companies that can weather the ups and downs of the market.
The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks. Is now the time to buy Nvidia? Access our full analysis report here, it’s free.
What is the market telling us:
Nvidia’s shares are very volatile and over the last year have had 9 moves greater than 5%. In context of that, today’s move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The biggest move we wrote about over the last year was 11 months ago, when the stock gained 23.7% on the news that the company delivered an exceptional quarter that topped analysts’ estimates across key metrics. Revenue surpassed expectations by an impressive 10.3%, driven by strong data center revenue. Notably, the company improved profitability, with both gross margin and operating margin outperforming expectations. Earnings per share (EPS) beat by an impressive 18.8%. Inventory levels experienced a nice decrease during the quarter. In addition to the outstanding quarterly results, the revenue guidance for the next quarter surpassed expectations by over 50%. Yes, that’s not a typo. Similarly, the operating profit guidance exceeded Consensus estimates meaningfully.
Founder and CEO Jensen Huang emphasized the ongoing transformations in the computer industry, particularly the advancements in accelerated computing and generative AI. He highlighted Nvidia’s readiness to seize the opportunities presented by the anticipated trillion-dollar shift in global data center infrastructure from general-purpose to accelerated computing, as firms implement generative AI into their business operations.
Overall, the company’s blowout quarter, with its impressive revenue growth, enhanced profitability, and positive guidance, underscored its strength in the market. Nothing in this world is perfect, but this was a near-perfect quarter.
Nvidia is up 58.8% since the beginning of the year, but at $764.31 per share it is still trading 19.5% below its 52-week high of $950.02 from March 2024. Investors who bought $1,000 worth of Nvidia’s shares 5 years ago would now be looking at an investment worth $16,239.
Unless you’ve been living under a rock, it should be obvious by now that generative AI is going to have a huge impact on how large corporations do business. While Nvidia and AMD are trading close to all-time highs, we prefer a lesser-known (but still profitable) semiconductor stock benefitting from the rise of AI. Click here to access our free report on our favorite semiconductor growth story.
