A Whimper From the Market's Top Bellwether
Dear subscriber,
We shouldn't put much focus on a single company's earnings.
But I'm here to tell you the financial story of the week. And this week, that's Nvidia (NVDA)... Its earnings announcement on Wednesday felt like a letdown for both bulls and bears.
At this point in my investing career, I'm midway through the transition from a growth stock optimist to a cranky old permabear. But Nvidia's movement over the past year has given off all the "vibes" of a market top.
At a Taiwan tech conference in June, a woman asked Nvidia's CEO Jensen Huang to sign her shirt. That's not normal stock market behavior. Nvidia has hit rockstar level...
That was only one fan. But the movement is growing.
On social platform X this week, videos circulated of a New York City bar hosting a watch party for Nvidia's second-quarter earnings. And CNBC obliged with a second-by-second, full-screen countdown to the earnings release.
I'll admit, I'm someone who eagerly awaits earnings releases. But I don't treat them like the New Year's Eve ball drop. I'm alone with my spreadsheets like a normal person.
While spotting these folksy market-top indicators is fun, it's a side sport to actual investing.
Even if the news is a bit saturated, Nvidia earnings do deserve a few moments of your attention – for at least two reasons...
First, you probably own a lot of Nvidia's stock already. The company makes up nearly 7% of the S&P 500. If you have $500,000 in your 401(k) invested in S&P 500 index funds, that could be $35,000 in this single stock.
And since so many people have an investment plan like that... when Nvidia collapses, it could hurt a lot of retirement nest eggs.
Second, I highly suspect Nvidia could be the stock that ends this bull market.
Bull markets tend to end on a shocking bit of news that sucks the air out of investors.
Usually, you don't see it coming. But on the list of potential culprits is an earnings whiff from Nvidia.
That's because AI is the hottest trend supporting stocks today. And Nvidia is leading the AI race.
Fortunately, when Nvidia reported its second-quarter results on Wednesday, we didn't get an earnings whiff. Instead, we got a mixed bag...
Nvidia beat expectations for revenue, margins, and earnings per share ("EPS"). The company even raised future guidance for sales. But it missed on free cash flow.
Shares fell more than 6% by the end of Thursday.
The problem is that there are analysts' published expectations... and then there are investors' real expectations. Investors wanted a little more than Nvidia gave them.
What upset investors was that revenue growth had slowed to "only" 122% year over year...
But stocks are priced on expectations. The growth rate of the growth rate has turned in the wrong direction. And Nvidia shareholders got accustomed to revenue growth of more than 250%.
They also expect larger beats on earnings estimates, which have averaged 9.5% each quarter over the past four years. This quarter, earnings only beat estimates by 5%.
In other words, it's getting harder for Nvidia to beat – let alone match – investor expectations...
This is why playing with growth stocks priced for perfection can be so tough.
We don't so much care about whether Nvidia is up or down 6%. Instead, we're looking for deeper insights on the AI boom. Nvidia delivered on that front.
Specifically, we're watching for signs that AI infrastructure may be overbuilt or that the hype is calming down.
And while revenue growth of 122% may disappoint Nvidia investors for a day or two, the company's data center revenue is still booming. Quarterly revenue for the segment grew 155% from the year prior to $26.3 billion...
That's no surprise.
Nvidia's data center business comes down to the buying decisions of just four guys... CEOs Satya Nadella, Sundar Pichai, Andy Jassy, and Mark Zuckerberg.
In each of their recent earnings calls (for Microsoft, Alphabet, Amazon, and Meta Platforms, respectively), they essentially told investors they would continue to pursue AI spending with no regard for a financial return.
Alphabet's Pichai may have said it the most directly...
[When] you go through a [technology] curve like this, the risk of underinvesting is dramatically greater than the risk of overinvesting for us here... I think not investing to be at the front here, I think, definitely has much more significant downsides.
As I told you earlier this month, Big Tech companies are pursuing AI dominance with religious fervor.
Obsolescence means death in the tech world.
At some point, investors in these mega-cap companies will enforce financial discipline and the tech titans will pull the reins on spending.
But thankfully for Nvidia, it wasn't this quarter.
What Our Experts Are Reading and Sharing...
Last week, we noted that McDonald's (MCD) earnings showed consumers were tightening their purse strings on fast food, while Chipotle Mexican Grill's (CMG) earnings said the opposite. It seems to be the same story when it comes to clothing... Earnings from Lululemon Athletica (LULU) suggest consumers are cutting back on buying new clothes. However, Gap's (GAP) recent results paint a different picture.
Tablet Magazine recently published a long profile of Palmer Luckey – the owner of the world's largest video-game collection. The article talks about how he built the Oculus virtual-reality headset, sold it to Facebook, got political, then started a defense company now worth $14 billion... an all-around bizarre life story.
Mortgage rates have barely started to eke lower, but the housing market is already warming up. Our own Brett Eversole discusses why he's bullish on housing in a recent issue of DailyWealth.
New Research in The Stansberry Investor Suite...
Nvidia is an incredibly innovative company. Its chips have been a driving force in the AI revolution.
But not all innovation comes in the tech sector...
Today, we're using our proprietary Stansberry Score to dig into one of the most innovative companies in the world... one that has its hands in virtually every industry.
It has tens of thousands of products. And you undoubtedly have about a dozen of them in your house right now.
Most of its biggest hits came by mere happenstance. But it has long been a business-school case study on how a large company can innovate and continue to grow over decades.
As a Stansberry Investor Suite subscriber, you can read the entire report here.
If you don't already subscribe to The Stansberry Investor Suite – and want to learn more about our new special package of research – click here.
Until next week,
Matt Weinschenk
Director of Research
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