California, 29 August 2024 (TDI): A sign of discouragement for investors hoping that a robust prediction from the leading supplier of AI chips could lead to further gains in Wall Street’s most valuable businesses, Nvidia’s shares and other tech heavyweights dropped late on Wednesday.
In the aftermath of Nvidia’s quarterly results release, NASDAQ futures dropped almost 1%, indicating that traders anticipate a decline in tech equities on Thursday.
After forecasting third-quarter gross margins that could fall short of market projections and revenue that was mostly in line, Nvidia’s stock price fell by about 7% and lost $200 billion in value. A few more AI-related businesses saw their combined valuation decline by around $100 billion.
Advanced Micro Devices and Broadcom both had 2% decreases in their stock values. For each, Amazon and Microsoft saw almost 1% decrease.
Based on data from options analytics firm ORATS, if the late-day decline in Nvidia shares on Wednesday continues into Thursday, it will fall well short of the 11% price swing the options market had priced for the shares.
For several quarters, Nvidia’s AI chip demand drove it to surpass consensus analyst predictions, a trend that encouraged investors to anticipate ever-larger margins from the business.
A beat on second-quarter revenue and adjusted earnings, together with the announcement of a $50 billion share buyback, were overshadowed by weak projections of Nvidia.
They won, but this was just one of those instances where there were a lot of expectations. According to JJ Kinahan, CEO of IG North America and president of online broker Tastytrade, “I don’t think they could have had a good enough number for people to be happy.”
As we approach what is usually a tumultuous time of year, the market’s mood may be influenced by the poor reaction to Nvidia’s earnings report.
According to CFRA data, the S&P 500 had its poorest monthly performance in September, down 0.8% on average since World War Two.
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A further indicator of whether the labor market weakness that rattled stocks in early August has subsided is the US jobs report, which is due out next week.
Over the past year, gains on Wall Street have been driven by optimism about AI technology, partly because of phenomenal rise of Nvidia.
But after an earnings season that saw investors punish tech company shares whose results fell short of justifying their high valuations, investors’ faith in that surge has soured in recent weeks.
The fact that Microsoft, Alphabet, and other big participants in the competition to control developing AI technology are increasing their already substantial expenditures has also alarmed investors. Despite their reports from last month, Alphabet and Microsoft’s equities are still declining.
As a result of the AI-bellwether’s quarterly estimates falling short of investors’ high expectations, which have fueled a massive surge in the company, Nvidia shares fell 7% in Frankfurt on Thursday, matching a decline in US after-hours trade.
Although the current quarter’s sales and gross margin estimate fell short of analysts’ predictions, it did not meet Wall Street’s expectations, which has been a recent trend.
The announcement of a $50 billion share buyback and a beat on second-quarter revenue and adjusted earnings were overshadowed by that.
Nvidia’s stock is still up around 150% this year even though it ended the regular trading session on Wednesday down 2.1%.
Based on LSEG data, Nvidia predicted sales for its fiscal third quarter of $32.5 billion, give or take 2%. This is lower than the $31.8 billion average estimate from analysts. Compared to the same quarter last year, that sales prediction indicates an 80% gain.
For the third quarter, the Santa Clara, California-based company projects an adjusted gross margin of 75%, give or take 50 basis points. Based on LSEG data, analysts expect the gross margin to be 75.5% on average.
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The day before Nvidia’s report was released, the company’s stock fell 2.1%. The largest winner of Wall Street’s AI bounce, it has increased by almost 150% so far in 2024.
Before its quarterly report, Nvidia’s stock was trading at a cheap 36 times earnings, which is less than its average of 41 over the previous five years. The S&P 500 is currently trading at 21 times projected profits, which is higher than the average of 18 for the previous five years.
