Nvidia’s Profit Taking Is Getting Ugly, but It Might Get Worse

Stocks dipped today, setting the stage for more downturns as investors await earnings from top retailers for clues on consumer strength amid skepticism over a “soft landing” scenario.

The Nasdaq Composite led with early losses, dropping about 0.4% as the week started. The S&P 500 went down by roughly 0.3%. Meanwhile, the Dow Jones Industrial Average decreased by approximately 0.2% following a rocky previous week.

Earnings are top of mind with markets reopening after Presidents’ Day, featuring reports from Walmart and Home Depot. Home Depot’s stock fell after indicating demand hasn’t rebounded amid persistent inflation. On the other hand, Walmart’s stock rose, buoyed by a positive sales forecast and a dividend hike.

Recent figures have put the feasibility of achieving the Federal Reserve’s 2% inflation target without a major downturn into question, leading to fewer bets on an interest rate cut this spring.

And though retail earnings stole the spotlight today, Nvidia’s earnings tomorrow will undoubtedly be the most important event of the week. As a handful of megacap stocks drive most gains, any shortfall from the AI-centric chipmaker could trigger a broader market retreat.

Nvidia, set to report fiscal fourth-quarter earnings after tomorrow’s close, stands as the third most valuable public company globally. Its stock has seen a fivefold increase since the end of 2022, driven by soaring demand for its GPUs, pivotal in AI developments like ChatGPT.

Nvidia’s market capitalization reached about $1.8 trillion last week, only trailing Microsoft and Apple.

Bank of America analysts highlighted Nvidia’s stock surge as “parabolic,” maintaining a buy rating and attributing the rise to a blend of fear, greed, and the rush for AI-related investments.

With other tech giants having reported their quarterly results, all eyes are now on Nvidia.

Analysts predict a 240% revenue jump to $20.6 billion for the period ending Jan. 28. Net income is expected to increase over sevenfold to $10.5 billion from the previous year.

Significant growth is anticipated in Nvidia’s data center segment, including its AI chips, with revenue expected to nearly quadruple to $17.06 billion.

Investors and analysts will closely watch comments from Nvidia CEO Jensen Huang for insights into future growth expectations. The company’s major GPU sales to tech giants like Microsoft and Amazon pose a risk if these companies dial back AI hardware spending.

D.A. Davidson analyst Gil Luria warned investors of a potentially mixed long-term demand outlook from Nvidia’s top customers. Despite current optimism, there are early signs of a possible demand slowdown.

Nvidia’s gaming segment is also projected to grow, but at a slower 49% rate to $2.72 billion in revenue. Some gaming cards are also utilized by smaller entities and researchers for AI purposes. Graphics processors (GPUs) have stalled greatly in terms of efficiency over the last three years, offering customers far less bang for their buck compared to past generations. The last truly impressive steps up in processing power (relative to cost) came in 2020, but virtually no cards were available at MSRP at the time due to limited supply and immense demand.

In response, Nvidia and AMD raised prices without delivering increased performance. This trend is not showing any signs of changing as GPU reviewers have grown weary of the latest offerings from both major chipmakers. Gaming ultimately is not Nvidia’s focus anymore – AI is – but what happens if the AI excitement starts to fade?

Shareholders will be asking themselves these questions if AI-related revenues fall below expectations, which are extremely high despite today’s selloff.

We’ll find out tomorrow afternoon, but today’s profit-taking might get ugly as the session progresses.

Especially if the VIX starts to jump again, just like it did in response to last Tuesday’s hot CPI surprise.


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