Why Is Nvidia (NVDA) Dropping in Front of Earnings?

Nvidia building
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The last forty years or so of my life have been dominated by financial markets, and I have therefore learned that facts are far more important than feelings or fantasy. That is why I abhor conspiracy theories and those who promote them. It may “feel” to you that the moon landing was fake, or that contrails are evidence of government evil, or whatever, but in cases like that I really don’t care about your feelings because the facts are clear.

That dislike of conspiracy theorists is why I hope Nvidia (NVDA) beats expectations when they report earnings after the bell today. It is not because I own the stock, but because after NVDA has pulled back sharply for a couple of days, the conspiracy theorists will be out in force if the company misses or gives weaker than expected guidance this afternoon.

NVDA chart

NVDA hit its highs a week ago today when it touched $742.36 in intraday trading and closed at $739. After a big drop yesterday, it is down again in this morning’s premarket trading. If it were to open where it is as I write, that would represent an 8.26% decline from that intraday high a week ago. That is a significant move, even for a stock as volatile as NVDA can sometimes be, but it doesn’t mean that “someone knows something” or that “the fix is in.” There are perfectly logical reasons why the stock could have been falling over the last week, reasons that don’t involve criminal activity or some vast conspiracy.

You probably don’t need me to tell you this, but NVDA has come a long way in a relatively short time. $742.36 represented a gain of over 254% in year and, if you go back five years, NVDA was trading below $40. After gains like that, some nervousness amongst traders and investors going into earnings is perfectly understandable. Traders know all too well that when a stock or other traded instrument has moved that far that fast, a retracement is always likely on any news, even if the news itself is positive.

Anyone who is familiar with the phrase “buy the rumor, sell the fact” knows that. When everyone is positioned one way, a counterintuitive move on any news is common. Everyone who wants to buy already has, making a move up on any news unlikely, but some profit taking can result in a small move down, whatever the numbers say. Once such a move begins it can easily prompt others, fearful that there is something they have missed, to join in, and a vicious cycle in which selling begets selling begins. That could easily be what is happening here with NVDA. It is just that this time the move up has been so extreme that the profit takers aren’t even waiting for the news.

Or it could be that some owners of the stock believe that there will be a “law of large numbers” thing going on when Nvidia releases their calendar Q4 earnings this afternoon. Big percentage gains in earnings and revenue are a lot easier to achieve when a company brings in $5 billion, as Nvidia did in 2016, than when it has sales of well over $40 billion, as it did in 2023. It is easy to disappoint in percentage terms when the numbers get that big, even though results may still be impressive in dollar terms.

On top of that, it is quite possible that analysts’ estimates have finally caught up with reality. Nvidia is completely dominant right now in the largest area of economic growth in the world: AI. Their chips have been the unrivaled gold standard during a period when not having AI capability was seen as unforgivable for just about every corporation, resulting in growth that was beyond the imagination of Wall Street analysts.

Nobody likes to look foolish for too long though, and even analysts, who are famous for underestimating will eventually start to think of a number and then double it when they are consistently proven to be way off. A few years of spectacular positive earnings surprises have created a situation where that is expected, but a big beat is much less likely when the estimates start to factor in past big beats.

When I lay it all out like this, it almost makes me want to sell in front of earnings, not because I have inside knowledge, but because the odds look stacked against a big enough beat from Nvidia to satisfy the market this afternoon, almost regardless of the actual result. Logically, it is far more likely that that is what is driving this move than that there is a nefarious group of traders who already know what is coming. However, logic has never stood in the way of a good conspiracy theory before so I doubt this time will be any different should Nvidia not report another spectacular beat.

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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