Nvidia Mania Has Passed its Zenith

By Kyle Rodda, senior market analyst at Capital.com 
 

”Nvidia’s earnings signal that the AI hype train is slowing down. Nvidia’s results underwhelmed market expectations. The stock fell in after-hours trade following the release of its Q2 earnings, with the company unable to exceed the increasingly high bar set by the market. However, Nvidia’s performance last quarter was solid on any objective measure. Sales growth exceeded 120% and beat forecasts, while EPS rose more than expected to 67 cents. The only blemish was sales guidance for the next quarter, which was towards the lower end of analyst estimates.

There are three related reasons why the stock fell. Firstly, market sentiment has cooled, and the resulting momentum-trade has faded. Secondly, even by its lofty standards, multiples are rich, with price-to-sales at 40-to-1 historically marking the top end of what even the most ardent investor is willing to pay for the stock. Finally, the drivers of the company’s fundamentals are better understood, reducing the distribution of outcomes for the stock price and making it easier for analysts to model and markets to price-in the future.

Despite the “miss”, there are reasons to be optimistic about Nvidia and the broader market. Earnings growth is quantifiably strong, and should the US economy achieve a soft landing, that will encourage flow into the stock. The company’s results also show resilient, albeit moderating, AI capex from other mega-tech companies. Guidance pointing to ongoing chip demand shows the AI investment boom, which has been a critical part of US macroeconomic outperformance, remains relatively robust.

The main takeaway from Nvidia’s results is that Nvidia-mania has passed its Zenith. This dynamic isn’t necessarily a bearish omen for its stock or the broader market; it just means that, from now on, it will be analysed and valued like any other company.”