Will Nvidia Earnings Answer the Key Question on Everyone's Mind?
The stage is set for results from the market's largest capitalization stock. Can Nvidia turn the tide?
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There was a shift in the character of the market action on Tuesday as the hardest hit speculative stocks, small-caps, and growth names managed to produce a weak bounce. Pressure intensified on some of the big-cap leaders, causing the DJIA and Nasdaq 100 (QQQ) to breach their 50-day simple moving average.
This has been a very uneven correction, so it isn't too surprising that the hardest-hit names managed to produce an oversold bounce while the pressure picked up on the indexes that have been covering up the carnage under the surface.
The stage is now set for the very important earnings report from the largest market capitalization stock in the market — Nvidia (NVDA) . Nvidia has been the 800-pound gorilla leading the AI revolution, and the reaction to its report will help answer whether there is a bubble in the AI sector.
The market is illustrating grave concerns about AI valuations. The data center group has been pounded, and the Magnificent Seven (MAGS) is under pressure, with just Alphabet (GOOGL) managing to stay close to its all-time highs.
Market concerns about AI valuation have been bubbling up for a while, but it was Palantir's (PLTR) earnings report that finally triggered a market response. Palantir's results and its forward guidance were very strong, but with a trailing P/E of nearly 300, it was extremely difficult to justify the valuation even if it was growing revenues by more than 50%.
The issue on Wednesday night will be whether investors believe Nvidia's valuation remains justified. If the answer is no, then it will trigger a further market correction.
Nvidia is not nearly as expensive as Palantir. It trades at a trailing P/E of 52, and last quarter it saw revenue and EPS growth of about 50%. Consensus estimates are for EPS of $1.26 and revenue of $54.9 billion. That represents EPS growth of 55% and revenue growth of 57%. The company expects EPS growth of 49% for the fiscal year ended October 2026.
Based on those numbers, Nvidia's valuation is not extreme. Some bears might argue that Nvidia is cyclical like other semiconductor names, so it should be given a lower P/E, but that depends on where we are in the AI cycle. If it is just the third inning, as the bulls claim, then a high P/E is deserved.
Some Nvidia holders are likely looking to sell on a positive earnings response. The price action following the report will be very instructive and provide insight into the market sentiment about AI. Is the sector just undergoing some healthy corrective action to remove excess, or is this a significant top that will confirm the argument that a bubble exists?
A strong report is expected, but I'm skeptical that even with a beat and increased guidance, Nvidia stock will be able to recoup recent highs. I don't think AI is topping, but there will be a shift in leadership as valuation becomes a more important consideration.
We have a little earnings bounce action on Wednesday morning, but Nvidia will be the only thing that matters after the close.
At the time of publication, Rev Shark had no positions in any securities mentioned.
