NVDA, the premiere AI chip maker, reports 1Q25 earnings after the close today. The consensus estimate is that eps will come in at $.93 per share. The progression of recent quarters’ results, earliest to most recent, is:
$.68
$.81
$.89.
So earnings growth has clearly been decelerating for some time. Arguably, then, a continuation of this trend itself should not be earthshaking news. Prior to the ban on sales of AI chips to China late last year, this deceleration was due mainly, as I read the financials, to the disappearance of operating leverage as SG&A expense (basically, payments to company researchers and salespeople) progressively shrank as a percentage of sales.
NVDA has made a statement about the impact on the government’s sales ban, saying that this will result in a loss of $15 billion in future revenue and a one-time charge of $5.5 billion to write off chips it has ordered from TSMC that can no longer be sold.
If we look at the recent price action of the stock, it reached an all-time high of $153 in early January, fell to around $86 three months later, before rallying to the current $135 or so as I’m writing this before the NY open today.
The big question: what will happen to the stock when it reports after today’s close, assuming that earnings come in as analysts expect and there are no big negative surprises announced by management?
Put a different way:
–if we’re in a world where professional analysts reevaluate and buy and sell a stock as news comes out, then, arguably, the 40%+ drop in the stock price earlier in the year factors in most/all of the bad news about sales to China. So the stock should go up or down based on how the actuals deviate from projections and what new information management may disclose during the earnings announcement
–if we’re in a world dominated by trading bots designed to react quickly to actuals being announced rather than estimates analysts have projected based on their own fact-finding, as well as news releases, then we could see an ugly reaction to the company’s announcements after the close.
It will be interesting to see what happens.
As for myself, my younger son persuaded me to buy NVDA years ago. I’ve held most of what I bought back then until late last year. As regular readers will probably know, I began to worry then that the market didn’t fully understand that earnings growth would begin to decelerate in 2025 as SGA expense became more trivial, leaving sales growth as the only real factor driving earnings. So I sold most of what I owned in the fourth quarter, replacing some of it with AVGO.
I started buying back a smallish amount of NVDA in the high $90s. That says I think the first alternative above is what will happen.
But I’m not sure. It will be interesting to see.