Nvidia has us talking in derivatives

This isn’t the first time a stock has beaten earnings estimates and fallen, and in this case, a slightly softer than expected growth outlook and some issues in the roll-out of its next-generation Blackwell products were factors in the market reaction. However, the main reason seems to be that the beats just weren’t as exceptional as previous quarters, with Revenue and Net Income growth ‘only’ up 122% and 168% respectively year-over-year. Yes, the average estimate was beaten, but the market was expecting to be surprised and the most aggressive estimates to be toppled. Compare this to January when net income growth was 585% year-over-year, which completely blew out of the water any analyst predictions.

Nvidia’s growth has been nothing short of remarkable, from a fairly niche producer of products which make online gaming faster, to being at the centre of the global AI race. And certainly over the past couple of years, despite delivering tangible and breath-taking earnings, there have been comments that this could all be a bubble. That is quite something when a company is delivering a return on equity of around 100% (20% is a ‘good’ number) and a net profit margin close to 50% on exponential revenue numbers.

To be fair any ‘bubble’ comments are largely a question on AI in general and whether Google, Facebook and others are likely to continue spending vast amounts on a technology which has shown no signs of being monetisable. This is not something that is Nvidia’s issue for now, and they have been adamant that there have been no signs of a slowdown in demand for their chips. Given the share price moves on the earnings, it hardly feels like the market is in any way in over-exuberant, bubble territory.

To display this lack of exuberance, let’s consider that the market is not just asking whether Nvidia’s earnings have beaten estimates, and not even by how much they have beaten estimates, but what is a second derivative question (and the point made at the start of the article): whether they have beaten expectations of how much they would beat earnings estimates by.

To be clear, this happens all the time, with reactions to earnings making it apparent whether we are in a bullish or bearish period; that this is happening to the hottest company and on what would in most conditions be celebrated financials is why the reaction is particularly notable. Markets are clearly on edge, unsure whether imminent rate cuts are something to celebrate or the actions of a Fed that is behind the curve to the extent a recession is a clear risk. Nvidia has clearly grown into a bellwether name, much like we watch Caterpillar financials as a signal for economic strength, we are now having Nvidia results parties (or so I have been told having never been invited to one), with the mood music a good indicator of whether to be long or short risk.