What Happened:
Shares of leading designer of graphics chips Nvidia (NASDAQ:NVDA) jumped 15.5% in the morning session after the company reported fourth-quarter results with a meaningful revenue beat, strong gross margin improvement, and EPS outperformance vs. Wall Street's estimates. Notably, revenue grew 265% year-on-year and 22% sequentially. The strong topline performance was mostly driven by the data center segment, which was up 409% year-over-year and 27% sequentially as demand for Nvidia processors optimized for generative AI, LLMs (large language models), and other AI workloads continued to accelerate. Notably, the company estimated that roughly 40% of Data Center revenue was driven by AI-related applications.
Guidance for the next quarter was also good, with revenue, gross margin, and implied operating profit coming in ahead of expectations. The company noted that growth in the data center and professional visualization segments is expected to more than offset the anticipated seasonal decline in gaming. Zooming out, we think this was a great quarter that shareholders will appreciate.
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What is the market telling us:
Nvidia's shares are very volatile and over the last year have had 8 moves greater than 5%. But moves this big are very rare even for Nvidia and that is indicating to us that this news had a significant impact on the market's perception of the business.
The previous big move we wrote about was 2 days ago, when the company dropped 5.7% as equities pulled back, with market participants likely taking profits ahead of a big earnings week. Tech stocks led the decline, with the Nasdaq index down 1% while the SP 500 fell 0.5%. Some of the notable stocks reporting earnings during the week include Walmart (NYSE:WMT), and Booking Holdings (NASDAQ:BKNG).
Stocks have had a good run since the fourth quarter of 2023 as markets expect the Fed to begin cutting rates as early as the first half of 2024 amidst cooling inflation data. The market's momentum continued into the early weeks of 2024 following solid earnings results from big tech names, including Meta (NASDAQ:META), Amazon (NASDAQ:AMZN), and Microsoft (NASDAQ:MSFT).
As a reminder, the driver of a stock's value is the sum of its future cash flows discounted back to today. With lower interest rates, investors can apply higher valuations to their stocks. No wonder so many in the investment community are optimistic about 2024. We at StockStory remain cautious, as following the crowd can lead to adverse outcomes. During times like this, it's best to own high-quality, cash-flowing companies that can weather the ups and downs of the market.
Nvidia is up 61.5% since the beginning of the year. Investors who bought $1,000 worth of Nvidia's shares 5 years ago would now be looking at an investment worth $19,552.
Unless you’ve been living under a rock, it should be obvious by now that generative AI is going to have a huge impact on how large corporations do business. While Nvidia and AMD are trading close to all-time highs, we prefer a lesser-known (but still profitable) semiconductor stock benefitting from the rise of AI. Click here to access our free report on our favorite semiconductor growth story.