Summary- Nvidia achieved in Q2 FY19 what Jensen Huang, the founder and CEO, declared as "another great quarter". However, the market disagrees.
- I dissected the quarterly earnings announcement to see why the investor sentiment soured.
- The technical chart of NVIDIA looks bearish.
- Investors on the sidelines might have to think twice as they would be coming in at a higher price point and valuation at a time when the narrative surrounding NVIDIA is less bullish than before.
- There is a saying that Mr. Market is always right but does that ring true for NVIDIA today?
NVIDIA Corporation (NVDA) fell 5 percent on Friday in reaction to its Q2 FY19 results. As if to prove its point, the market drove the share price down further, albeit just slightly, in post-market trading. The chip maker actually performed well, with the revenue up 39.9 percent Y/Y to $3.12 billion, in what Jensen Huang, the founder and CEO of NVIDIA, declared as "another great quarter". GAAP earnings per diluted share for the quarter nearly doubled to $1.76, or 91 percent higher than a year ago.
All the good showing would come to naught if it had already been expected or in other words, the business improvements have already been priced into the share price. In the case of NVIDIA, with the revenue a beat of $20 million and the EPS higher than consensus estimates by $0.10, arguably, there remained some element of positive surprise. Of course, the market chose to focus on the fact that the company produced the smallest surprise in a string of 13 consecutive quarters that it beat on revenue (and the 12th quarter for EPS), dating all the way back to Q1 of 2015.
To be fair, the market was perhaps concerned about the Q2 FY19 revenue falling 3 percent sequentially. With the GAAP EPS lower by 11 percent from $1.98 in the previous quarter, that certainly didn't go down well with shareholders who have seen NVIDIA's share price rise by nearly 10 times in the past three years. Given that the S&P 500 has appreciated only one-third while media favorite and market darling Amazon (AMZN) has only risen by 2.5 times in the same period, it is understandable why investors are holding NVIDIA to a higher standard. However, NVIDIA is not alone in enjoying the phenomenal market attention. Its industry peer, Advanced Micro Devices (AMD), has also experienced a 10-fold increase in its share price, with the bulk of the jump happening in just the past couple of months. Thus, NVIDIA did not seem like a perfect candidate for disappointment in such circumstances but of course, the market decided otherwise.