Nvidia’s Results Calm Nerves – For Now
Marcus Padley breaks down Nvidia’s latest earnings, what they mean for AI sentiment, and why Big Tech still carries major risks despite the beat.
Good morning. It is Nvidia (NASDAQ: NVDA) results today, and they have come out after hours. As expected, they are really good, and are being described as a beat beat raise. They have beaten on earnings, beaten on revenue, and raised guidance. And I think this was pretty much to be expected. CEO Jensen Huang is one of those CEOs who cares about his share price, and he therefore manages expectations really well. On that basis, expectations are always kept a little bit in reserve and then beaten, with guidance up as well.
The price after hours is up about 4 per cent. It keeps moving and has been up 6 per cent at one point. The share price is up about 4 per cent after hours, having been up 2.8 per cent in normal trade. Most of the Big Tech stocks are up around 1 per cent after hours as well, which bodes well for the US market tonight. Palantir, which is the mini-me of Nvidia and seen as one of the AI poster boys, is up about 4 per cent.
I think what this result does is calm a lot of nerves. It was a risky moment, Nvidia results, and this probably reduces the chance of some sort of precipitous sell-off in Big Tech stocks and particularly AI stocks. But I do not think it really changes the story much.
The Bigger Issues Have Not Gone Away
Nvidia is still a very expensive stock, and all the issues remain for hyperscalers over how they are going to fund the CapEx: circular deals, competition, but the big one is whether they are ever going to get a return on investment on their AI CapEx. Are people going to pay enough for AI? Expectations are still very grand and seemingly unlikely to be hit. Those doubts remain despite Nvidia having a very good set of results.
Bear in mind, Nvidia is the pick-and-shovels stock selling GPUs. It is not about AI earnings for them. Ultimately it is, but for now they are a fantastic company at the peak of their fortunes, with all these commitments to build data centres. For the other Big Tech stocks, it is about where the earnings are coming from and, more importantly, when they are coming. I do not think those doubts have gone away.
The market has sensibly sobered up to the AI hype in the last few weeks. Nvidia itself has dropped about 14 per cent. If it is up about 4 per cent tomorrow on top of 3 per cent, it is only down about 7 per cent from the top. If you look at it on a chart, it is not a material correction. It is still in an uptrend. This result will calm nerves, but whether you would buy Big Tech at this point for a reflation of people’s wildest hopes is another matter. I think that would be optimistic at this point.
Big Tech Is Still Expensive
The hyperscaler issues remain and the sector is still very expensive. For instance, Nvidia is on a PE of 42 times. These earnings will bring some small upgrades, but not enough to change that much. From a PE of 42 times to the broader market on the S&P 500 at 20 to 25 times, if it ever returned to that range, you are looking at a 40 per cent drop in the share price.
So I think we are still up there. It is not enough for us to say, let’s get stuck back into Big Tech. We would need some of the bigger questions answered from the hyperscalers regarding when earnings are coming along instead of just when CapEx is coming along. The CapEx we have taken for granted. We have sobered up. We have assessed that we need some earnings. At this point, all the stocks continue to look expensive.
Why We Are Not Buying Yet
As we look for themes to put cash into in the Strategy Portfolio and the MT20 Portfolio, which is a real portfolio with members in it, that portfolio is in cash at the moment. I think it is unlikely we will be diving back into Big Tech now.
Plus, there are a few other risks coming up. We have the data dump after the US government shutdown, coming on Friday night. We have delayed US jobs numbers. Overnight, the Fed minutes suggested it is unlikely we are going to see a rate cut in December. “Not appropriate” was the phrase. The odds of a rate cut in December have dropped to 30 per cent from 50 per cent overnight, and they were 100 per cent a month ago. So the chance of rate cuts is falling away. That is a bigger thematic for the market than whether the Big Tech bubble reflates, which I think is unlikely.
So we are just going to spend a few days. We make decisions every morning when we wake up. The decision this morning is: good results, precipitous moment less likely, but not excited about diving into overvalued Big Tech stocks at this point. That changes every day, and the only way you can keep up with that is to subscribe to Marcus Today.