What Nvidia’s Earnings Beat Tells Us About the Reality of A.I. Investing

Shah Gilani|August 25, 2023

In the rush to lionize Nvidia Corp (NVDA) for all things A.I. chip-wise and lauding Artificial Intelligence (yes, people are capitalizing the full name as if it’s a proper noun) as the Second Coming, it seems many are willing to suspend the reality we know for some forthcoming sentient-imbibing reality whose dark side is expected to be sanitized by another newly found, more likely created, light emanating from A.I. itself.

Hogwash.

Nvidia isn’t the only semiconductor chip company, nor is it the market, though many investors and traders think it’s now a proxy for stocks or a new benchmark index. Following NVDA as if it is the be-all-end-all will only sink many portfolios and retirement accounts.

First of all, as much success as Nvidia has had this year, a lot of their prosperity was driven by a narrative about what A.I. could be, coupled with a narrative about what the Federal Reserve was going to do about interest rates. It’s been a compelling pair of stories, and it’s not hard to understand why investors would be moved by it.

But given what’s happened in the market this week, there’s a good reason to believe that the narrative is shifting, and realities are setting in that Nvidia, along with all other tech stocks, will soon have to face.

Second of all, as promising as A.I. is, it won’t just come about with Nvidia’s chips, and neither will it be so divine that it ends the shadowy workings of criminals, fraudsters, and fakes. It will more likely provide too many of them with a cloak of invisibility while it simultaneously strips millions of good jobs from good people.

Now, to be clear, there is still plenty of money to make on NVDA, if you play it smart. But to do that, you have to know what’s really driving the stock now and understand what the dark side of A.I. truly looks like.

Fortunately, I’ve got your back on both counts. We’ve got a lot of ground to cover, so let’s get started.

First off, credit where it’s due: hats off to Nvidia! The company is hitting it out of the park on all metrics, on all measures of its sales, profitability, and expectations for a lot more of the same for some time to come.

Nvidia, pronounced “en-VID-eeyah” (because the Nv, short for “next version,” is combined with “invidia,” the Latin word for looking upon someone with envy, where the VID is a designed nod to the company’s roots in graphics cards — thanks to Bloomberg for help on the pronunciation and history), just reported its quarterly earnings and blew almost everyone away.

Revenue for the quarter came in at $13.5 billion, twice the revenue over the same quarter a year ago, 90% more than their first-quarter revenue, and easily surpassed analysts’ consensus estimates for $11 billion in sales. Revenue was even $2.5 billion more than management guided for.

The icing on the cake, as far as revenue goes, was management’s guidance that Q3 revenue could reach $16 billion, where analysts had projected $12.5 billion.

Profit per share came in at $2.70 vs. consensus estimates for $2.07, and the company announced a $25 billion share buyback program.

Stellar, no doubt, but not a new sunrise in the West.

Nvidia has a leg up right now in chips known as graphic processor units, or GPUs, used extensively in gaming and, more importantly now, in A.I. applications. These are in hot demand from data center operators whose customers are transforming from general-purpose computing to accelerated computing and generative A.I. However, this lead is being chased hard and fast by every other chip maker.

Which brings me to “chip maker.” Nvidia doesn’t make the chips it designs; they don’t manufacture any of them. Most are made by Taiwan Semiconductor and Samsung. Knowing this, you might consider other chip makers designing new GPU chips and how they’ll compete with Nvidia for market share. Nvidia isn’t Tesla, with a moat around its business, at least not as long as Tesla enjoyed its starring role in all things EV. Competitors are coming, just as they are for Tesla.

And while Nvidia’s on a roll, it’s not a bellwether for the market.

When I was on the CBOE Floor in 1982, the prevailing saying, as far as a bellwether for the market goes, was, “As GM goes, so goes the market.” Does anybody look at General Motors now to gauge where the market’s going? No one. For a while, Apple was a bellwether, but that was about the smartphone revolution and tech-related matters. Not many people look solely to Apple to make market decisions. And they shouldn’t look to Nvidia, though over the past year that’s been tempting.

Nvidia became the poster child for the A.I. narrative, which got a rocket boost from the introduction of ChatGPT, and almost perfectly coincided with another hot narrative that the Fed would not only stop hiking by the second half of 2023, but they’d also start cutting rates. These narratives drove traders into tech stocks that rising rates pummeled, concentrating many bets on Nvidia.

So, good for Nvidia. But it’s noteworthy how market watchers were hell-bent on expecting benchmarks, especially the Nasdaq Composite and Nasdaq 100, to jump if Nvidia beat earnings expectations. They didn’t just beat; they crushed it. And, of course, the stock rose more than 9% in the after-market on the day of NVDA’s earnings report.

Then reality set in. The next day, as the sun rose in the East, the overnight gains in Nvidia and the pop in Nasdaq futures started to fade. By midday, it was gone; by close, NVDA was slightly up, and the Nasdaq was down about 1.25%. So much for Nvidia being the new bellwether.

Interest rates remain high and might rise further. The hit that tech stocks took when rates began to spike is still an overhang they all have to confront, valuation-wise. Nvidia is no exception.

Given that the market’s been showing signs of exhaustion, and Nvidia’s impressive 300% growth in 2023, it’s not wise to chase Nvidia stock now. If the market falters, Nvidia won’t be its savior. This suggests buying Nvidia on dips, especially a big one, because both Nvidia and the market are currently overpriced.

And when you invest in Nvidia, anticipate new highs, but don’t be complacent; it will eventually be overshadowed by new chip designs from competitors.

As for the shadows A.I. is casting, like the potential loss of millions of jobs to A.I. and criminal activities enabled by A.I., we’re already seeing — and will continue to see — unforeseen consequences.

That’s why I’ve prepared a full investment briefing to get you ready for all the changes that are coming. In it, I review the little-known industries that have the potential to skyrocket to global prominence as A.I. proliferates, some of which are guaranteed to grow at the same pace as A.I. does.

The profit potential on these small companies is many times what the big firms will return in the same timeframe – basically like investing in Microsoft or Google before they became household names.

You can get my full report by clicking here.