Despite Nvidia's impressive earnings, its stock experienced a decline. History may point to the following developments.
It's no secret that NVIDIA (NVDA negative 1.41%) is one of the most sizzling artificial intelligence (AI) stocks in the market today. The semiconductor giant recently reported an impressive Q3, outperforming Wall Street's sky-high expectations. However, the stock saw a decline in trading when the market opened on Thursday.
Although it might seem illogical, this is not an uncommon occurrence. So, let's delve into why they occur and see if we can gain some insights into what might happen next. First, let's explore NVIDIA's Q3 performance.
Even for NVIDIA, this was a remarkable quarter
Few companies carry as much weight as NVIDIA does in the current market. NVIDIA's performance is often seen as a barometer for the market as a whole. It's fortunate then, that NVIDIA delivered a strong quarter.
NVIDIA's data center segment continues to be the cornerstone of its success, but its gaming division is also showing healthy growth. Demand for its Superchips and related hardware is at an all-time high. As CEO Jensen Huang puts it, "The era of AI is in full swing, driving a worldwide transition to NVIDIA computing."
The biggest news is the confirmation that Blackwell, the latest iteration of its Superchips, is on schedule and will be rolled out without a hitch. Huang emphasized during the earnings call that the first chips are already in the hands of all of NVIDIA's major partners and will soon be shipped to end-users -- companies like Meta and Microsoft operate massive AI data centers.
According to Huang, demand for Blackwell is "overwhelming"; NVIDIA has so many orders that it is struggling to keep up. Yet, there's still strong demand for NVIDIA's current Hopper chips, and Huang suggested that orders would continue well into the following year.
NVIDIA's reach is global
Beyond the numbers, NVIDIA highlighted some significant developments that demonstrate the growing demand beyond U.S. commercial clients. Denmark just launched its first AI supercomputer powered by NVIDIA's Hopper chips. This is an important client base for NVIDIA that is often overshadowed by its success with big tech cloud operators. "Sovereign AI" - world governments running their own computers - could be a massive industry as nations around the world enter an information arms race.
NVIDIA is also finding commercial success worldwide, with new private companies in India, Japan, and Indonesia building NVIDIA-powered AI data centers.
NVIDIA's stock slides
In the initial hours after the market opened on Thursday, NVIDIA's stock slipped, temporarily reaching $141 from $145.95 the day before. But why would this happen after such a strong quarter? This is a relatively common scenario if Wall Street's expectations exceed the company's performance, even if that performance is impressive. That's not what happened here. NVIDIA surpassed expectations handily, delivering revenues of $35.1 billion and earnings per share (EPS) of $0.81. Consensus targets were $33.2 billion and $0.75, respectively.
This paradoxical situation can arise when market sentiment overshoots even Wall Street estimates. With all the excitement around NVIDIA and talk of "amazing" demand for its new chips, it's becoming increasingly hard for the company to live up to investors' expectations, no matter what numbers it reports. It's a testament to NVIDIA's success.
Certain research has shown that investors tend to place too much faith in past earnings. Over time, this can lead to a stock being overbought in the lead-up to an earnings release and a short-term dip after the release. What NVIDIA is experiencing is completely normal.
Don't panic. The long-term potential is where we should place most of our focus here, and this report shows that it is still operating at full capacity. Given other stocks that have been in NVIDIA's position in the past, and NVIDIA itself last quarter - shares slipped 18% in the days following earnings - history suggests that the stock will recover.
Despite NVIDIA's impressive Q3 performance and surpassing Wall Street's earnings per share (EPS) target, its stock experienced a decline upon market opening on Thursday. This can sometimes occur when the market's expectations exceed the company's performance, creating a situation where the stock may need time to adjust.
For investors interested in the long term, it's worth noting that stocks in similar situations, including NVIDIA itself in the previous quarter, have typically recovered after a short-term dip following earnings releases.
[Aside: It would be interesting to see if there's any data available on the average recovery time for stocks in this situation. This could provide useful insights for investors]
