Nvidia's Earnings Report Could Impact Stock Market Rally

Nvidia’s Earnings Report Could Impact Stock Market Rally

by John Nowacky
in News, Release
on 22 May 2024

Semiconductor company Nvidia is set to report its earnings, posing a significant test for the current U.S. stock market rally. Nvidia’s shares have experienced a remarkable 90% surge this year, making it the third-largest company in the U.S. by market value, trailing only Microsoft and Apple. Due to its prominence in the field of artificial intelligence (AI), Nvidia’s results are seen as a pivotal factor for assessing the performance of the AI industry, which has been a driving force behind the bullish trend in U.S. stocks.

Nvidia’s increasing weighting in indexes and exchange-traded funds has also intensified its influence on broader markets. As a result, its share price movements now have a disproportionate impact on the overall market. With a weight of over 5% in the S&P 500, 6.5% in the Nasdaq 100, and 20% in the VanEck Semiconductor ETF, strong performance from Nvidia could potentially lift many other stocks along with it.

The earnings report from Nvidia comes at a time when major U.S. stock indexes, including the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average, have reached record highs. These milestones have been achieved following a volatile April, with an overall positive earnings season and renewed optimism about the U.S. economy’s trajectory towards a so-called soft landing.

If Nvidia delivers robust earnings, it could bolster the market’s confidence in other megacap companies such as Microsoft and Alphabet, which have already reported well-received financial results. Such positive outcomes would help justify the current valuations of stock markets, which have become elevated in recent months. The S&P 500 currently trades at a forward earnings multiple of 20.8, significantly higher than its historical average of 15.7, according to LSEG Datastream.

Given Nvidia’s central role in the AI sector, its financial results have the potential to significantly influence investor perceptions of this major investment theme. Chuck Carlson, CEO at Horizon Investment Services, highlights that Nvidia’s presence in AI extends to various sectors, making it a crucial player in this evolving industry.

Nvidia’s fiscal first-quarter results will be released after market close on Wednesday. The outcome of their earnings report could impact the share prices of other AI-related companies, some of which have experienced recent declines following impressive gains. In contrast, Nvidia’s stock remains close to its all-time intraday high, further emphasizing the market’s high expectations for the company. Analysts anticipate the company’s quarterly revenue to triple to $24.6 billion, according to LSEG.

Nvidia’s extraordinary results from a year ago, when the company projected quarterly revenue significantly exceeding Wall Street estimates, fueled the market’s enthusiasm for AI-related investments. The company’s stock skyrocketed by 24% the following day. This time around, options markets suggest that Nvidia’s shares could witness an 8.6% move in either direction by the end of the week, translating into a market capitalization swing of $200 billion, greater than the market value of around 90% of S&P 500 companies.

While Nvidia’s surging share price attests to its success, the company faces the challenge of meeting high expectations to maintain its stock performance. Investors may anticipate strong revenue figures accompanied by robust future projections. Matt Benkendorf, CIO at Vontobel Quality Growth, emphasizes the volatility and unpredictability of Nvidia’s revenues, despite its current positive outlook.

Nevertheless, Nvidia’s valuation has adjusted alongside its share price surge, receiving support from analysts who raised their profit expectations for the company. The stock is now trading at around 34 times forward 12-month earnings estimates, down from over 80 times in the middle of last year, according to LSEG Datastream.

Deepon Nag, Portfolio Manager at ClearBridge Investments, notes that unlike many AI-driven companies, Nvidia’s stock performance has primarily been driven by its fundamentals, underscoring the company’s sound financial position.

As investors await Nvidia’s earnings report, its outcome will likely have a significant impact on the trajectory of the stock market rally, particularly for AI-related sectors.

Additional relevant facts:

1. Nvidia’s earnings report also holds importance for the gaming industry, as the company is a leading manufacturer of graphics processing units (GPUs) used in gaming consoles and computers.

2. Nvidia has been actively expanding its presence in the data center market, providing GPUs for artificial intelligence and machine learning applications. The growth of this market segment is closely tied to Nvidia’s financial performance.

3. The shortage of semiconductors globally has impacted the tech industry, including Nvidia. The company has faced challenges in meeting the demand for its GPUs, which could affect its earnings report.

4. Nvidia has faced controversies in the past related to its business practices, including accusations of anti-competitive behavior and the use of proprietary technologies that limit consumer choice.

Key questions:

1. How will Nvidia’s earnings report impact the valuation of AI-related companies and the broader stock market?
2. Will Nvidia’s strong performance justify the elevated valuations of stock markets?
3. Can Nvidia continue to meet the high expectations of investors and maintain its stock performance?
4. What impact will the global semiconductor shortage have on Nvidia’s financial results?

Advantages of Nvidia’s earnings report:

1. The report provides insights into the performance of the AI industry, which has been a significant driver of the stock market rally.
2. Positive financial results from Nvidia can boost investor confidence in other megacap companies and justify current market valuations.
3. Nvidia’s strong fundamentals and expanding presence in the data center market contribute to its positive outlook.

Disadvantages of Nvidia’s earnings report:

1. High expectations may put pressure on Nvidia to deliver robust earnings, potentially leading to market disappointment if expectations are not met.
2. The volatility and unpredictability of Nvidia’s revenues pose a challenge for the company in maintaining its stock performance.
3. The global semiconductor shortage could impact Nvidia’s ability to meet the demand for its GPUs, which may affect its financial results.