Nvidia Earnings Are Coming. Big Tech Is Priced For Perfection

Dow Jones08-23

You would think that the last week of August should be the doggiest of the dog days of summer on Wall Street as traders hit the beach to enjoy the end of summer before Labor Day. But there is a huge market event looming that investors won't want to miss: Nvidia's earnings report.

One money manager suggested that the artificial-intelligence chip giant's results may even overshadow Federal Reserve Chair Jerome Powell's eagerly anticipated comments about inflation, the economy, and interest rates during his Jackson Hole speech Friday.

"Move over, Fed, it's all about Nvidia's earnings on August 28th. The waiting is the hardest part," quipped Gina Bolvin, president of Bolvin Wealth Management Group, with a nod to the late Tom Petty.

Nvidia will need to post another blockbuster quarter and issue upbeat guidance to justify valuations for tech stocks that are suddenly looking pricey again.

The Roundhill Magnificent Seven exchange-traded fund, which only owns Nvidia, Apple, Microsoft, Amazon.com, Alphabet, Meta Platforms, and Tesla, is trading at about 36 times earnings estimates for 2024. That is up from the P/E of 32 the fund was trading at following the market selloff on Aug. 5.

It is also higher than both the broader market and the rest of tech. The S&P 500 is valued at about 23 times this year's earnings forecasts while the Invesco QQQ Trust, which tracks the Nasdaq 100 index, sports a P/E of 30. The Magnificent Seven skew those multiples higher since they dominate both market-cap-weighted indexes.

It should go without saying the pressure is on Nvidia to prove to Wall Street that the AI hype is real and help justify Big Tech's lofty valuations. Nvidia is trading at about 47 times forward earnings estimates. Tesla is the only Magnificent Seven stock with a higher valuation; its P/E it approaching 100.

But Nvidia may be up to the challenge.

Earnings and revenue are expected to more than double from a year ago. And it's worth remembering that Nvidia faced lofty expectations in May, the last time it reported earnings. The company wound up doing its best Aaron Judge impersonation and smashed it out of the ballpark. Earnings topped analysts' forecasts by 7%, igniting another big rally in tech stocks.

Considering that other major tech companies have already issued rosy expectations for AI-related products and services, that should be good news for Nvidia, which counts Microsoft, Amazon, Alphabet, and Meta among its largest customers.

"Each of the companies highlighted robust demand and investment in AI-related products that should support [tech] earnings moving forward," said Raymond James chief investment officer Larry Adam in a report, referring to the Big Tech companies that have already reported earnings.

"Strength in earnings is why we favor megacap tech and would use any periods of weakness as buying opportunities," Adam added.

Nvidia's chips are also in strong demand from customers outside of tech, such as the automotive industry.

"Nvidia continues to experience strong demand from key customers across all of its processors and is having a difficult time keeping up with the demand," said Ivan Feinseth, chief market strategist of Tigress Financial Intelligence, in a report. Feinseth added that "significant upside exists from current levels" for Nvidia.

Wall Street agrees. Nearly all of the sell-side analysts who cover the stock have a Buy rating on it and the consensus price target is nearly 10% above current levels.

Yes, Nvidia is the very definition of a crowded trade, one where nearly everyone is in agreement that the stock should keep going up. But Nvidia has continued to reward its investors, as well as shareholders in other Big Tech giants riding its wave of momentum, time and again.

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