Market Pulse: Nvidia Earnings, What To Expect
In 4 minutes, understand exactly what to expect for Nvidia’s earnings report at market close.
In 4 minutes, understand exactly what to expect for Nvidia’s earnings report at market close.
Nvidia smashed earnings estimates last quarter (earnings beat by 30.31% and revenue beat by 21.78%) but the stock sputtered in the weeks and months after, going from a high of just over $500 to $392 at the nadir.
The primary driver of Nvidia’s relentless climb upwards over the last year is demand for its AI chips. I’m not exaggerating when I say that demand has been absolutely bonkers. Nvidia’s data center revenue went from $4.2B in Q1 2023 to $10.32B in Q2. That’s a 171% year-over-year increase and a 146% quarter-over-quarter increase! 🚀
As such, nothing else matters besides Nvidia’s AI chips business (reported within its data center revenue segment).
With great earnings comes greater expectations. For today’s earnings report, the market expects $16B in revenue (+55% from Q2) and $3.37 in EPS (+25% from Q2). These are huge expectations. Even if Nvidia manages to smash them, we don’t think it’s enough for the stock to rally. It didn’t rally last earnings with a +30.31% EPS beat and a +21.78% revenue beat and it won’t rally this time even with similar numbers. We think that the market cares the most about guidance from the company.
A big overhang on the company’s guidance is US-China politcallical tensions. The Chinese market represents 20-25% of Nvidia’s data center revenue and the US recently introduced a second set of semiconductor export restrictions to China. These new restrictions won’t affect this quarter’s results but they’ll certainly affect next quarter’s guidance.
The market is waiting with baited breath on what the new guidance will be in lieu of the new October export restrictions. Everyone is also nervous about what other future restrictions the US could introduce that will shrink Nvidia’s significant Chinese business.
With Nvidia’s stock back at all-time-highs above $500, the risk-reward balance is skewed to the downside given Wall Street’s sky-high expectations and a shrinking Chinese market due to heightened US-China geopolitical tensions.
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The Details
TSMC earnings were not spectacular (a proxy for Nvidia earnings)
Given that TSMC manufactures the vast majority of Nvidia’s chips, its financial performance servew as a reasonable proxy for Nvidia’s financial performance. Thankfully, TSMC also reports earlier than Nvidia. This time around, they reported in mid-October but their results were middling.
The company only beat revenue expectations by 1.4% (EPS beat was larger but revenue is a better approximation of Nvidia’s business volume). In fact, according to TSMC’s earnings presentation, the quarter’s revenue for High Performance Computing (encompasses AI chips) only grew by 6%. This doesn’t bode well for Nvidia’s earnings.
Nvidia rallied into earnings. Why?
In short, four things:
Macroeconomics: the October inflation report came in cool, increasing hopes of the Fed dropping interest rates sooner than expected. Long-term interest rates have also been falling as the US Treasury recently announced a smaller-than-expected debt-raising plan for the next few months.
Geopolitics: Xi Jinping and Joe Biden recently met in person at APEC in San Francisco. This signaled a possible easing of tensions between the two countries that could slow down or lessen semiconductor export sanctions to China (unlikely to happen, but hopeful). To add fuel to the optimism, Israel and Hamas also agreed to a cease-fire over the weekend.
AI excitement: Nvidia is the hottest stock in AI right now and the market bought up the stock in anticipation of another blowout earnings report. This might be unfounded optimism given the stock’s fall after the previous earnings report despite massive beats on the top and bottom line.
Michael Burry puts on a massive short on the semiconductor industry
Famed hedge fund manager Michael Burry, known for his “Big Short” bet against the housing market in 2008, recently disclosed a massive short against the semiconductor industry through his hedge fund’s third quarter 13F filing. The fund’s largest position is puts against 100,000 shares of the iShares Semiconductor ETF (SOXX) which accounts for almost 50% of the portfolio.
It’s unclear why Burry thinks semiconductors are a good short at this point but this position certainly puts doubt in the bull thesis moving forward.
What does Burry know that the market doesn’t?
Nvidia’s response to the new October export restrictions
Last year, the US government banned semiconductor exports to China. However, this ban only affected Nvidia’s top-of-the-line H100 AI chips while China could still purchase the downgraded H800 and A800 chips. Last month, the US government tightened export sanctions by banning a wider range of US-designed chips from China.
To clarify the impact of these bans on Nvidia, the company published an SEC filing stating that the new restrictions applied to the company’s A100, A800, H100, H800, L40, L40S, and RTX 4090 chips. Although the company doesn’t think the new rules will result in a “near-term meaningful impact” on financial results, it certainly has long-term consequences.
China accounts for about 21% of the company’s overall revenue and 20-25% of its data center revenue.
For a stock with a 120 Price-to-Earnings ratio (about 3 times many of its semiconductor peers), it can’t afford to lose such a big chunk of revenue.
