Investors used to deal in the business of delayed gratification.
Buy the stock of a quality company. Hold on to that stocks for 10-20 years while management worked their business plan. Way down the road you sold, making multiples of what you invested.
Things have changed.
That investment timeline has been compressed into a 3–4-year cycle, and NVIDIA feels like it is now in the seventh inning of a nine inning game.
NVIDIA (NVDA) is and will be a long-term growth story over the next 10 years. It just won't be the same growth company that you've known and loved over the last four years.
The company has all the feel of Intel in 1998. It is the leader of its industry continues to innovate and demand for their product is off the charts. But check a chart of Intel in 2002.
The company will continue to post returns better than their industry peers.
But with Advanced Micro Devices (AMD) breaking into a long-term bear market trend along with Weakness in the other AI stocks, “better than your peers” may still include losses.
But what makes a company like NVIDIA return 100%, 200% or more over a year is that the company catches investors by surprise.
Companies like NVIDIA thrive if they continue to exceed investor expectations, but that seems to be harder for the company to do today than it was just two years ago.
This is why the company is stuck with an overbearing risk as it heads into earnings this afternoon.
Maybe you’ve seen this chart here at Moneymorning.com, but you haven’t seen it anywhere else.
It’s NVIDIA’s Achilles Heel. The one thing that can cause the stock to stop running higher.
As it stands this morning, 94% of the analysts covering NVIDIA stock have it ranked a buy or a strong buy.
These numbers have been the same over the last 9 months, indicating that NVIDIA is the most loved stock on Wall Street.
But the stock’s performance has started to taper as investors worry about the company’s valuation.
Just this morning there was a story about NVIDIA’s earnings report this afternoon that said investors “Hope that NVIDIA (NVDA) will impress again when it reports quarterly results after the close”.
There’s a saying that I use often….
“Stocks climb up a wall of worry and slide down a slope of hope.”
As of now, it isn’t unreasonable for investors to be hoping that NVIDIA will beat their earnings marks this afternoon. What they don’t realize is the carnage that will happen in the case that the company has a misstep.
High expectations means that the company absolutely must continue to impress. One slip and NVIDIA falls prey to sellers.
The reason is simple.
Investors’ high expectations have resulted in an extremely high valuation. As long as NVIDIA can continue to show signs that the market’s valuation is within its reach, investors remain happy.
But as the gap between investors expectations for earnings and revenue begins to get narrower, the stock becomes more at risk of widespread selling from any mishap.
The chart below displays NVIDIA’s earnings “beat” trend along with the stock’s post-earnings performance for the last five years.
The early data in the chart displays the strength of NVIDIA, and the resulting strength in the stock, as earnings continued to climb and pummel analyst’s expectations.
More recently though, over the last three quarters, NVIDIA’s “Earnings Beat Margin” has started to tighten as the company’s results are coming in just above consensus estimates.
That trend has consequences if continued.
Last quarter, NVIDIA’s earnings of 0.68 were better than the target by $0.03. That beat was down significantly from the previous three quarters, an average of $0.58 better than targeted.
The chart of revenue and EPS “surprises” shows the tale of the tape as both figures are now regressing towards The Street’s expectations.
This trend needs to be reversed. NVIDIA’s share prices will start reflect the future of lowered expectations otherwise.
Another motto that investors should follow is
“Stocks move higher and lower because of speculation, not necessarily fundamentals”.
Investors have been bidding NVIDIA shares to their astronomic levels as speculation runs wild that the company’s new Blackwell chips will return revenue and earnings to the trajectory of two years ago.
This is the one thing that investors will need to listen for during the company’s conference call and guidance.
Tomorrow’s trade will have nothing to do with the actual results, which may be lower than expected due to issues with the Blackwell chips, but everything to do with the outlook.
NVIDIA shares have seen a “buy the rumor” rally ahead of the company’s earnings report. This indicates that the stock is facing a higher probability that investors first reaction the report will be selling.
From a technical standpoint, shares of NVIDIA have two support levels to watch.
The $132 price is where NVIDIA’s 50-day moving average sits.
This key technical level will be the first support level that draws in the “buy the dip” crowd.
A break below $130 will target the stock’s next support level of $120. This is the price that has seen considerable consolidations and tops in NVIDIA’s stock price since June.
From a long-term perspective, considerable bullish support lies at the $110 and $100, both prices that investors would start jumping over each other to buy shares.
