How Investors Should React to Nvidia's (NVDA) Earnings

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After the market closed yesterday, the graphics processing company Nvidia (NVDA) announced Q4 results. They completely blew past expectations for EPS of $1.08 by returning earnings of $1.32 per share on higher than forecast revenue of $7.64 billion. Those numbers represent year-on year growth of 69% and 53%, respectively. In addition, the company raised estimates for Q1 revenue to $8.1 billion, nearly a billion over what analysts were anticipating before the release. What is surprising is not that NVDA had great earnings -- after all, this is the twelfth straight beat for them -- but that the stock is now trading around 7% below yesterday’s close as I write this morning.

NVDA chart

Normally, when that happens, it means that there is something going on that you have failed to account for. Weakness in what should be a growth area, maybe, or some kind of warning about upcoming conditions that doesn’t bode well for the future. Here, though, neither of those apply. Every division of the company and every line item in the report were success stories last quarter and the only “problem” that Nvidia has right now is one that most companies would love to have: they are struggling a bit to keep up with demand for their products and services.

“Aha!”, you might think, “That’s it! The market is worried about those supply chain constraints that we have heard so much about!” Wrong again. Nvidia founder and CEO Jensen Huang said in a statement accompanying the release that those problems were easing, and that supply would increase “substantially” later this year.

There are, therefore, really only two possible reasons for such a negative reaction to such a great earnings report. First, it could be just that the market is down overall as the news from the Russia/Ukraine border worsens, and NVDA is being dragged down with it. That would make sense to some degree but doesn’t account for a 7% drop when the S&P 500 is down just over 1%. The second is more likely, that the reaction to Nvidia’s earnings is being seen by the market as good, but not as good as it could have been. That means that when the conventional wisdom changes, NVDA will almost certainly bounce back strongly, but it also means that as long as it persists, the stock can continue to act illogically and head lower during this time.

Conventional wisdom can be a dangerous thing, both in life and in markets. In both, it can lead to a mind closed to anything outside of the widely held opinion, and a situation where evidence that contradicts the prevailing view is either misinterpreted or more commonly, simply ignored. The consequences of succumbing to that kind of groupthink are nowhere near as tragic for traders and investors in the context of markets as they are for societies, where it leads to bigotry and hate. However, it can be significant, nonetheless, and should inform strategy in a situation like this. It leads to bad news being dismissed as “not as bad as it could have been" and good news greeted with a shrug of the shoulders and a chorus of “could have been better!” views that can persist and continue to defy logic for some time.

Eventually, however, the stock of a company that is growing fast and making a ton of money while doing it will reflect those fundamental facts. That makes NVDA a buy but means that the best strategy may be to buy regular, small amounts in order to average into it rather than jumping in with both feet. Then, if you do that, you are left waiting for when the conventional wisdom fades enough to allow the stock to reflect the reality rather than the groupthink.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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