Wednesday is NVIDIA Earnings Day

This week may be a shortened trading week for US markets, but that doesn’t mean it’s any less meaningful. NVIDIA (NASDAQ:NVDA), the brightest of the Magnificent Seven companies, is preparing to report fourth-quarter earnings results after the markets close on Wednesday.

These results will affect everyone invested in large-cap stock market indices, regardless of whether they own NVIDIA stock or not. That’s because NVIDIA has a market capitalization of about $1.8 trillion, enough to push a market capitalization-weighted index fund up or down.

Additionally, NVIDIA is a symbol of the rally based on artificial intelligence that has been underway for some time since early 2023. An argument could be made that as long as NVIDIA stock can drive the entire technology sector higher, valuation no longer matters. Please be patient for now. Otherwise, the most vaunted members of Mag-7 may end up being the fastest and furthest.

A culture of high expectations

The 2020s will see endless blockbuster beat-and-raise quarters to keep Wall Street happy, especially among Big Tech companies. NVIDIA has been able to overpromise and overdeliver fairly consistently, but that’s a growth rate that’s hard to sustain.

Let’s take the third quarter as an example. NVIDIA reported record revenue of $18.12 billion, up 206% from the previous year. Revenue from the company’s data center segment increased 279% year-over-year to $14.51 billion.

Additionally, NVIDIA’s GAAP-measured third quarter 2023 diluted earnings per share increased 1,274% year over year. Of course, if you prefer non-GAAP measures, the company’s diluted earnings per share increased ‘only’ by 593%.

Clearly, NVIDIA CEO Jensen Huang wasn’t kidding when he declared, “The era of generative AI is coming.”

Passive income investors may be disappointed to learn that NVIDIA only pays a quarterly dividend of 4 cents per share. But NVIDIA stock isn’t meant to appeal to slow-but-steady winning investors. It’s fast and furious, and that’s what happens if NVIDIA’s trailing P/E ratio is close to 100 and dividend distributions are barely a consideration.

NVIDIA has truly met the modern stock trader’s need for speed. The company’s quarterly revenue and free cash flow (FCF) more than tripled in one year. Meanwhile, NVIDIA stock price has surged from $120 in October 2022 to over $700 currently.

Although the air is thin, the market will likely expect NVIDIA to hit another grand slam on Wednesday. Analysts expect NVIDIA to record revenue of $20.36 billion in the fourth quarter of 2023. This is three times more than the $6.05 billion recorded in the same period last year.

Wall Street also expects NVIDIA to earn $4.60 per share in the fourth quarter of 2023. By comparison, NVIDIA earned 88 cents per share in the year-ago period. In other words, analysts would like to see NVIDIA’s EPS grow 422.7% year-over-year. Isn’t that asking too much?

It’s not easy to be first

Undoubtedly, it is a net positive that NVIDIA controls approximately 98% to 99% of the AI ​​graphics processing unit (GPU) market. Of course, a monopoly like this may eventually come under regulatory scrutiny, but so far NVIDIA has dominated its niche unchecked.

However, it will be difficult for NVIDIA to maintain its massive market share. Certainly, NVIDIA’s loyal shareholders can’t expect the company to keep its competitors at bay forever, no matter how many steps they may be a few steps behind. Moreover, as Futurum Group CEO Daniel Newman told Barron’s, the AI ​​hardware hype phase, like all hype phases, certainly has an expiration date.

“It is possible that we will see quarterly declines as this large-scale cycle begins to end,” he said. “This doesn’t mean (sic) NVIDIA isn’t an incredibly well-positioned company, but (sic) competitors are entering the space and the competition has been delayed.”

NVIDIA’s competition may be late, but still formidable. In fact, there’s talk of SoftBank (OTCMKTS:SFTBY) founder Masayoshi Son potentially raising $100 billion to finance an AI chip venture that would compete directly with NVIDIA.

But for now, NVIDIA is in good shape, and Wednesday’s earnings event will effectively be the Super Bowl of the first earnings season of 2024. This has larger implications far beyond one AI hardware manufacturer, as market sentiment can change quickly. It won’t cost you a penny if NVIDIA delivers explosive results and falls short of guidance.

This could eventually weigh on large-cap indexes and signal the start of a surprisingly euphoric market rally. This is a dire scenario for NVIDIA enthusiasts and eternal optimists in the market. Or it could be a welcome return to a means that has been meaningless for too long.