Despite recent reports of impressive earnings performance, Nvidia’s stock experienced a decline.
For businesses such as Nvidia, the phenomenon of being “priced for perfection” can present risks. A price correction may result from any indication of vulnerability or even a small departure from the high expectations that drove the stock’s valuation. Investors might start to wonder if the recent surge in earnings estimates, sparked by the enthusiasm surrounding AI, has raised the bar so high that even significant earnings growth might not be enough to support additional share price increases.
TThis sentiment was emphasized by Thomas Matthews, head of markets for Capital Economics in Asia Pacific, who noted that although Nvidia’s earnings are still strong, the stock price decline may be a sign of investors’ growing doubts about the sustainability of current expectations. However, Matthews expressed optimism about the continued AI boom, predicting that the rally in stocks related to AI will probably continue.
Wall Street analysts also remain optimistic about Nvidia’s future, viewing the recent dip as a buying opportunity. Bank of America Global Research, led by Vivek Arya, reiterated its buy rating and raised its price target for Nvidia, emphasizing the company’s unique growth potential at a reasonable valuation. Despite concerns over Nvidia’s high valuation, Arya pointed out that the company’s projected earnings growth justifies its current trading multiples.
Nvidia’s gross margin, which dropped to 75.1% from 78.4% in the fiscal second quarter, was one area of minor concern. The company is predicting that gross margins in 2024 will be in the “mid-70% range,” which is marginally less than what some analysts had predicted. A decline in gross margins may indicate heightened competition or pressure on profitability, but some investors are waiting to see if this is a temporary dip or a longer-term trend.
Despite this, Nvidia’s overall earnings performance was strong, with the company reporting over $30 billion in revenue, surpassing analysts’ estimates. The company’s net income also surged by 168% year over year to $16.6 billion. Looking ahead, Nvidia provided revenue guidance for the fiscal third quarter that exceeded analysts’ forecasts, though it suggested a potential slowdown in revenue growth compared to previous quarters.
Tech analyst Dan Ives from Wedbush described Nvidia’s earnings report as a “mic drop moment” for CEO Jensen Huang, reinforcing the idea that the AI revolution is here to stay. Although Nvidia’s revenue outlook fell slightly short of some overly optimistic projections, Ives and other analysts remain confident in the company’s long-term prospects, particularly given the strong demand for its AI-centric chips.
Timothy Arcuri, an analyst at UBS, reaffirmed his buy recommendation and cited the notable increase in Nvidia’s supply and purchase commitments as signs of sustained robust revenue growth in the upcoming quarters. Arcuri stressed the importance of these metrics in predicting performance going forward, and Nvidia’s leadership in these domains points to a promising future.
While not all analysts are uniformly bullish, with some maintaining neutral ratings due to concerns about potential declines in demand for Nvidia’s chips, the consensus among many is that the recent sell-off presents a buying opportunity for investors.
