Could Nvidia's Q2 earnings be a new tech rally catalyst?

Summary

In this interview, Dan Niles, founder of Niles Investment Management, discusses Nvidia's market performance and future prospects amid AI growth. Despite short-term pressures and potential earnings volatility, Niles is bullish on Nvidia's long-term potential, drawing parallels to Cisco's internet infrastructure dominance. He advises investors to consider diversifying beyond tech, especially with rate cuts on the horizon, and highlights Meta's effective use of AI for growth at a reasonable valuation.

Takeaways

• 📉 Nvidia's stock is currently under pressure, down about 6-10%, despite being up over 40% from its August lows, adding over $500 billion to its market cap in just three weeks.
• 🚀 High expectations for Nvidia's next earnings report, especially after their EPS growth was over 400% in the first quarter, with anticipations to beat that again.
• 🔮 The discussion highlights a comparison between Nvidia's growth and Cisco's during the internet buildout, noting that Nvidia is still early in the AI and generative AI buildout phase.
• 📈 Long-term optimism for Nvidia's revenue growth and stock performance, suggesting potential for doubling over the next several years, despite short-term volatility.
• 🤔 Caution advised for investors considering buying at current levels, given the recent earnings season's impact on the 'Magnificent 7' stocks and the unpredictability surrounding Nvidia's earnings report.
• 🌐 Acknowledgment of the market's volatility and the potential for a post-earnings dip, especially with major customers like Microsoft, Amazon, and Google experiencing spending readjustments.
• 🔄 The possibility of an AI digestion phase in the future, once the Blackwell chips ship, as companies may be spending more on AI than necessary based on current revenue forecasts.
• 📉 Historical precedent of market corrections, even for successful companies like Cisco, which saw significant downturns during digestion periods or macro events.
• 💡 Advice for investors to broaden their portfolio, considering sectors that will benefit from rate cuts and a slowing economy, such as financials, consumer staples, and telecom services.
• 🏁 Long-term focus on earnings as the driver of stock prices, suggesting a reevaluation of the current concentration on tech and AI stocks.
• 📊 Meta is considered a leader in utilizing AI effectively, with better revenue and EPS performance compared to Microsoft, and a more attractive valuation.

Q & A

What is the current status of Nvidia's stock performance?

Nvidia's shares are under pressure, down about 6 to 10 percent, but the company is still up over 40% from its August lows, adding over $500 billion to its market cap in just three weeks.

What was the EPS growth for Nvidia in the first quarter?

Nvidia's EPS growth was over 400% in the first quarter.

What is the expectation for Nvidia's upcoming financial results?

Expectations are high for Nvidia heading into the next earnings report, with the market anticipating that they will beat revenues and EPS estimates.

How does the speaker compare Nvidia's current situation to Cisco's during the internet buildout?

The speaker compares Nvidia's growth to Cisco's during the internet buildout, noting that Cisco never had a down quarter sequentially in six years and its stock was up over 4,000%, while Nvidia is only six quarters into the buildout of generative AI and has seen its revenues and stock price rise significantly, but not to the extent of Cisco's growth at that time.

What are the potential short-term issues that Nvidia might face?

The potential short-term issues include delays in Blackwell shipments and the financial results of their three biggest customers—Microsoft, Amazon, and Google—which all reported lower than expected revenues and have influenced Nvidia's stock performance.

What is the long-term perspective on Nvidia's growth?

The long-term perspective is that Nvidia's revenues could double over the next several years, and the stock is expected to perform well, despite potential short-term volatility.

What is the speaker's stance on buying Nvidia stock at the current levels?

The speaker is not a buyer at the current levels, suggesting caution due to the recent volatility and the need to rationalize AI spend, but remains bullish on the long-term prospects.

What is the significance of the upcoming Jackson Hole event for the markets?

The Jackson Hole event is significant as it is expected to provide positive rhetoric from Central Bankers, discussing the pace of rate cuts and market support, which could positively impact market sentiment.

How does the speaker view the AI trade and its potential for digestion in the future?

The speaker believes that the AI trade will eventually go through a digestion phase as companies like Microsoft, Amazon, and Google adjust their spending on AI, which could lead to a period of AI digestion once the Blackwell shipments ship.

What sectors does the speaker suggest investors consider in a rate-cutting environment?

The speaker suggests considering sectors such as financials, consumer staples, and telecom services, which are likely to benefit from lower rates and have attractive dividend yields.

Why does the speaker believe Meta is currently the winner in AI compared to Microsoft?

The speaker believes Meta is the winner in AI because it has shown better financial performance, with increased revenue, EPS, and guidance for AI spending, and has demonstrated effective use of AI in its business, all while being more reasonably valued compared to Microsoft.