- Stock slips around 2.5% in pre-market to $122
- Q2 numbers beat again, and guidance remains robust
- Wall Street analysts predict $155 share price
After the intense build up, Nvidia (NVDA:NASDAQ) reported better than expected second quarter results overnight (28 Aug), and the chip designer announced a $50 billion stock buyback plan.
So, if the Q2 was so great, why is the stock staring at a near 2.5% drift pre-market? First, markets anticipate. In Nvidia's case, the market reaction suggests concerns in the quarterly report, including production issues with the new Blackwell chip, the return on the company’s massive capital outlay, or capex, as it invests in AI (artificial intelligence), and expected Q3 revenue guidance, which, while impressive, was a little shy of albeit astronomical analyst expectations.
The repercussions are felt more keenly by a stock like Nvidia because it trades at a steep premium to market averages – the S&P 500 forward PE (price to earnings) is 22.4, according to Y Charts data, versus Stockopedia’s 37.3 for Nvidia.
High valuations come with significant downsides. First, high valuations today could lower expected risk-adjusted future returns. Second, when valuations are high, positive outcomes are already priced in, so optimism needs to be driven to even higher levels to support the current share price, higher still if the stock is to push higher.
This means that it takes very little to shake confidence and crack seemingly unbreakable beliefs.
ASSESSING FUTURE PROFITS POTENTIAL
The key is an investor’s ability to judge beyond the near term and consider Nvidia’s longer run growth potential. In this regard, Wall Street analysts look unshaken, with a ‘buy the dip’ theme emerging.
Citi analysts said the results and guidance were better than expected thanks to the ‘robust AI demand strength.’ Bernstein raised its price target on Nvidia stock from $130 to $155.
‘Overall the company continues to deliver amid high expectations, and it seems clear that datacentre sequential growth is still well in the cards into year-end’, its analysts said.
Bernstein’s team believes that ‘several’ billion dollars of incremental Blackwell revenue into Q4 ‘should drive solid further sequential growth, and it feels to us that Hopper could easily continue to show sequential strength as well which might further accelerate things.’
