Triple Digit No Longer

• US stocks slipped on Wednesday as investors braced for Nvidia's highly anticipated earnings report, which is expected to significantly impact the tech sector and broader market.

• The S&P 500 fell 0.6%, and the Nasdaq dropped 1.1%, while the Dow lost 159 points.

• The consumer discretionary sector also lagged, with Tesla and Amazon each falling over 1.3%.

• In corporate news, Super Micro Computer tumbled 19% following the announcement of a delay in filing its annual report.

• In contrast, Nordstrom shares rose 4.2% on second-quarter earnings, and Ambarella jumped 10.6% on strong third-quarter revenue guidance.

We heard earnings from Nvidia - the state of the new industrial revolution is well intact.

But we already knew that. We heard last month from all of the tech giants that are working on the frontier of generative AI (Microsoft, Amazon, Tesla, Meta, Alphabet).

And they told us;

1. the price to build generative AI computing capacity continues to go up …

2. they will spend whatever it takes on the infrastructure …

3. the AI model intelligence continues to rapidly advance …

4. the stage of the technology revolution is still very "early."

So, given that they are all buying as many GPUs from Nvidia (the gold standard) as the company can produce, it was fair to expect another good report from Nvidia. 

With that, for Q2, Nvidia reported in the afternoon, and it was the fifth consecutive quarter of triple-digit year-over-year revenue growth. That has taken quarterly revenue from $6 billion to $30 billion in just a year-and-a-half. 

Here's what that looks like in a chart …

This explosive revenue growth has also been accompanied by explosive growth in profitability (a tripling of operating margins).

And with that, even though the price of Nvidia shares has skyrocketed over the past five quarters (chart below), the share price relative to its earnings power is cheaper today than it was five quarters ago (i.e. the earnings growth has outpaced even the torrid share price growth).

But as we discussed yesterday, the valuation dynamic for Nvidia is changing. The quarterly growth is no longer outpacing the share price growth. And with that, after the latest report, the stock is trading at 47 times annualised quarterly eps. 

It's not cheap. Moreover, it won't be a triple-digit revenue grower much longer. If we look at the trend in the quarterly change in revenues, Nvidia seems to be on a rhythm of consistently adding $4 billion a quarter in new revenue.  

That said, we already know demand is insatiable, so both the rapidly advancing technology in accelerated computing and supply constraints seem to have capped Nvidia's growth capacity (at least at this point). 

If this trend of $4 billion a quarter of additional revenue continues, Nvidia will be growing at a year-over-year rate of closer to just 50% by this time next year (no longer triple-digits).

This should curb the enthusiasm for Nvidia shares (for the moment). 

But as Jensen Huang said in the earnings call, the second wave of this technology revolution is just starting. 

It's enterprise AI. 

This is about scaling generative AI — delivering the capabilities to companies across all industries and governments. He says every job will have an AI assistant.

It's still very early.