Proactive Investors - Expectation is the source of all disappointment. Star Wars fans have known this since 1999. US Democrats felt it in 2016. The Republicans had their turn four years later.
Now, it seems, Nvidia (NASDAQ:NVDA) Corp stakeholders are the ones to have set themselves up for disappointment.
Despite topping revenue estimates in another record second quarter and guiding forward revenue safely above forecasts, Nvidia stock shed more than $200 billion in after-hours trades.
This of course must be taken into context. What’s $200 million between friends, given Nvidia’s $3.10 trillion valuation, plus the fact that this valuation has added more than 670% in just two years?
But the bearish market reaction to Nvidia’s results is just another example of the unsustainable demands the Street has on artificial intelligence-powered sales growth.
Like an impossible-to-please bachelor swiping left for the most inane of reasons, investors have taken a ruthless approach to big tech earnings in the age of AI.
To be fair, there was a red flag in Nvidia’s earnings print in the form of Blackwell, the group’s next flagship AI chip, may be coming later than initially hoped.
But it is coming nonetheless and demand is “incredible”, said Nvidia’s co-founder, chief executive and celebrity figurehead Jensen Huang. “Blackwell is going to be a complete game changer for the industry,” he assured.
Operating expenses were also up 48% year on year, presumably reflecting the ramping of these Blackwell chips. But wih $15.4 billion worth of shareholder returns confirmed for the first half, that should hardly be a concern.
Analysts react
This is what Ipek Ozkardeskaya, a senior analyst at Swissquote Bank, had to say of the second-quarter earnings: “The actual results and the forecast beat the average market expectations by a great margin and there was nothing the company could do more to keep the enthusiasm going… but hey, they fell short of the highest estimates on Wall Street.”
These “highest estimates” were for a third-quarter revenue forecast of up to $38 billion, rather than the $32.5 billion (plus or minus 2%) tabled by Nvidia.
Matt Britzman, senior equity analyst at Hargreaves Lansdown (LON:HRGV), touched on the comically large expectations surrounding Nvidia’s growth story.
“NVIDIA continues to defy gravity with its seventh straight quarter beating expectations on both the top and bottom line, showing a masterful delivery of performance and guidance from Jensen Huang and the NVIDIA team.
“But early trading suggests that’s not enough to keep the market happy. It’s less about just beating estimates now, markets expect them to be shattered and it’s the scale of the beat today that looks to have disappointed a touch.”
Quartlies are only a tiny snapshot of the wider picture and "investors tend to overstate the importance of one set of quarterly results in the grand scheme of AI", said Britzman.
As the primary supplier of high-end compute for this grand scheme, Nvidia's longer-term equity story should be the greater source of focus than volatile three-month reporting periods.
What is the moral of the story?
When a company’s earnings have a level of celebrification that Nvidia’s have managed to attract, it’s not enough to smash new records. You need to manage expectations too.