Nothing Else Matters: Wednesday Is NVIDIA Earnings Day

This is a shortened trading week for the U.S. markets, but that doesn’t mean it’s short on significance. The most magnificent of all the Magnificent Seven companies, NVIDIA (NASDAQ:NVDA), is getting ready to release its fourth-quarter earnings results after the market closes on Wednesday.

These results will affect anyone invested in large-cap stock-market indexes — whether they’re holding NVIDIA stock or not. That’s because NVIDIA’s market capitalization, at around $1.8 trillion, is hefty enough to move any market-cap-weighted index fund higher or lower.

Additionally, NVIDIA is emblematic of the artificial intelligence-fueled rally that’s more or less been in effect since the start of 2023. As long as NVIDIA stock can pull the entire technology sector higher, the valuations-don’t-matter-anymore argument might still hold up for a while. Otherwise, the most-vaunted Mag-7 member is liable to fall the fastest and the furthest.

A culture of great expectations

In the 2020s, nothing less than an endless string of blockbuster beat-and-raise quarters will satisfy Wall Street, especially among Big Tech companies. NVIDIA has been able to both over-promise and over-deliver pretty consistently, but that’s a tough growth pace to maintain.

Consider the third quarter as an example. NVIDIA posted record revenue of $18.12 billion, up 206% year over year. Revenue in the company’s Data Center unit soared 279% year over year to $14.51 billion.

Furthermore, NVIDIA’s GAAP-measured Q3 2023 earnings per diluted share increased 1,274% year over year. Of course, if you prefer non-GAAP measurements, the company’s earnings per diluted share “only” rose 593%.

Clearly, NVIDIA CEO Jensen Huang wasn’t kidding when he declared, “The era of generative AI is taking off.”

Passive-income investors may have been disappointed to discover that NVIDIA would only pay a quarterly dividend of 4 cents per share. However, NVIDIA stock isn’t meant to appeal to slow-but-steady-wins-the-race investors. It’s fast and furious, and if NVIDIA’s trailing P/E ratio is nearly 100 and its dividend distributions are barely an afterthought, so be it.

NVIDIA has truly fulfilled the modern stock trader’s need for speed. The company’s quarterly revenue and free cash flow (FCF) have more than tripled in a year’s time. Meanwhile, NVIDIA stock has zoomed from $120 in October 2022 to more than $700 now.

The air is thin up there, but the market will undoubtedly expect NVIDIA to hit another grand slam on Wednesday. For the fourth quarter of 2023, analysts envision NVIDIA reporting $20.36 billion in revenue, which would be more than triple year-earlier quarter’s $6.05 billion.

Moreover, Wall Street expects NVIDIA to post Q4 2023 earnings of $4.60 per share. In comparison, NVIDIA earned 88 cents per share in the year-earlier quarter. In other words, analysts want to see NVIDIA’s EPS grow 422.7% year over year. That’s not too much to ask for, is it?

It ain’t easy being number one

Without a doubt, it’s a net positive for NVIDIA to control an estimated 98% to 99% of the AI graphics processing unit (GPU) market. Sure, a monopoly like this might eventually attract regulatory scrutiny, but so far NVIDIA has dominated its niche market unchecked.

Yet, it will be a tall order for NVIDIA to maintain its gargantuan market share. Surely, NVIDIA’s loyal shareholders can’t expect the company to fend off its rivals forever, even if those rivals are several steps behind. Besides, as Futurum Group CEO Daniel Newman told Barron’s, the AI-hardware hype phase surely has a shelf life, as all hype phases do:

“There’s a possibility that you could even see quarter-on-quarter declines as you start to get to the end of this massive cycle,” he said. “Now, this isn’t to suggest that an [sic] NVIDIA isn’t an incredibly well-positioned company, but you have also [sic] competition entering the space, and competition has been late.”

NVIDIA’s competition might be late, but it could still be formidable. Indeed, there’s talk of SoftBank (OTCMKTS:SFTBY) founder Masayoshi Son potentially raising $100 billion to fund an AI-chip venture that would compete directly with NVIDIA.

For the time being though, NVIDIA is sitting pretty, and Wednesday’s earnings event will effectively be the Super Bowl of the first earnings season in 2024. There are larger implications that go far beyond one AI-hardware manufacturer, as the market’s mood could quickly turn on a dime if NVIDIA falls short of blowout results and guidance.

That, in turn, might weigh on the large-cap indexes and mark the beginning of the end of a stunningly euphoric market rally. It’s a horrific scenario for NVIDIA’s enthusiasts and the market’s eternal optimists — or, it could be a welcome reversion to a mean that’s been meaningless for far too long.