What Happened:
Shares of leading designer of graphics chips Nvidia (NASDAQ:NVDA) jumped 11.2% in the afternoon session after the company reported first quarter earnings results. Nvidia recorded healthy gross margin improvement, indicating elevated pricing power. Its revenue and EPS outperformed Wall Street's estimates, driven by better-than-expected results in its data center and automotive segments; the result in its automotive segment (17% year-on-year revenue growth) was especially impressive given the industry is in a cyclical downturn and many other semiconductor companies have posted year-on-year declines for that end market. Lastly, its inventory levels increased, likely due to the company stocking up on products in anticipation of strong demand.
During the announcement of the results, Nvidia issued a 10-1 stock split that will commence on Friday, June 7, 2024. Looking ahead, Nvidia's revenue for the next quarter beat expectations again. Overall, 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 11 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 22 days ago, when the company dropped 5.9% on the news that peer, AMD reported reported first quarter results which highlighted a material increase in its inventory levels. In addition, AMD's guidance for the next quarter was underwhelming as revenue projection was mostly in line with Wall Street's projections.
Super Micro Computer, another beneficiary of the current AI wave, reported underwhelming earnings as revenue fell below Wall Street's expectations, with the company calling out supply chain challenges. Like AMD, Super Micro provides data center infrastructure (servers, GPUs, and storage solutions) that power AI models. These include customized cooling racks that enable AI models to deliver better performance.
Overall, the underwhelming results and mixed outlook provided by these semiconductor players suggest the era of hypergrowth that has propelled the valuation of some of the leading innovators in the AI space might be cooling off as investors become increasingly cautious.
Nvidia is up 121% 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 $28,848.
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