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Nvidia (NVDA)’s Ability to Surprise Can Keep the Market’s Love for the Stock Alive

Nvidia building
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You might think that after a year or so of almost blanket coverage by both analysts and the media, Nvidia (NVDA) would be unable to say anything that would surprise the market or Wall Street in general. Yesterday, however, when they released their latest earnings, they managed to do just that on two fronts.

The first was an earnings surprise in the conventional sense, in that Nvidia beat consensus estimates on both the top and bottom lines. That shouldn’t really come as a shock given that they have done so pretty consistently for a couple of years now, but with analysts seemingly competing these days to issue the highest estimate for sales and profits for the AI boom poster child, it still manages to be a bit of a surprise. Beating low estimates is one thing, but beating estimates that everybody seems to believe are too high in the first place is quite another.

Even just the numbers were a bit shocking when you put them in context. Nvidia earned $6.12 per share versus the consensus estimate of $5.59 on sales of $26.04 billion versus $24.65 billion. Given the supposedly bullish estimates coming from the analysts and the simple rule of large numbers as it pertains to stock analysis, that is a remarkable quarter, one that has led to a chorus of “…this can’t go on!” from talking heads and pundits. They point out that adding forty or fifty percent to sales of more than $100 billion a year is tough enough, but with competitors seemingly bound to catch up, even maintaining the dominance that Nvidia now shows will be tough.

That would make sense if one or both of two things were true. If NVDA were priced at a level that could only be justified by massive beats of estimates, then a correction would look likely. Or, if Nvidia had a massive share of an essentially static market on which competitors could impinge, then that too would make predictions of a drop seem reasonable. However, neither of those things are true.

NVDA trades at around 38 times forward estimates. That is higher than the market average but not as high as many other less successful companies and, as we saw again this quarter, those estimates are woefully and consistently underestimating the company’s earnings power. And they operate in a market that is exhibiting massive exponential growth. The demand for the chips that can power large language model AI programs is growing so fast that predicting a slowdown is a fool’s errand. Right now, around 40% of Nvidia’s sales go to AI’s “big four”, Google (GOOG: GOOGL), Microsoft (MSFT), Meta (META), and Amazon (AMZN), but the technology has so many uses on so many levels that demand from smaller, slower adopting companies is still coming on tap at a remarkable rate. It is quite possible that even if other chip manufacturers do catch up to Nvidia, that will just put a dent in the new demand that will be created over the next year or two.

The second surprise was the announcement by the company that they will be splitting their stock. That is actually receiving more attention than the earnings and revenue beats, but it really shouldn’t…at least in theory. In theory, it makes no difference whatsoever. Investing $1000 in Nvidia will currently buy you one share as opposed to the ten it will buy in the future, but each new share will be worth one tenth of what the old ones were in terms of the percentage of company ownership they represent. In other words, the stock may be priced lower after the split, but it is not “cheaper” in value terms.

Still, even Nvidia themselves said that the objective was to "make stock ownership more accessible to employees and investors." In these days of fractional ownership in online investment accounts a split actually doesn’t change that accessibility, but this is a case where perception is often more powerful than reality. The perception of the public is that NVDA is now “cheaper” than it was before and, as we saw with TSLA and other high profile splits in the past, that can prompt a wave of buying from retail investors that can have a big impact on a stock.

As somebody who will be celebrating their 33rd wedding anniversary this weekend, I understand that retaining the ability to still surprise is an essential part of an enduring relationship. It keeps things fresh and can cause one to fall in love all over again on a regular basis, even after a few decades. Nvidia showed yesterday that they can still surprise the market, so the market’s love for the stock can continue, no matter what the unromantic naysayers want you to believe. 

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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