Did Nvidia print the top in microchips?

When Nvidia released its previous quarterly report on May 24, the company surprised with a much higher turnover in this business area in particular, and at the same time raised its guidance for the next quarter to an order of magnitude rarely seen for such a large company. CEO and founder of the company Jensen Huang stated in this connection that "The computer industry is going through two simultaneous transitions — accelerated computing and generative AI". Nvidia's customers are fighting for leadership in these areas, and the challenge for Nvidia has been to be able to produce enough to satisfy demand. As we can see from chart 1 below, the report led to a jump of as much as 26% in the stock at the opening the next day, and the price continued to remain strong in the weeks ahead. Nvidia actually rose a further 24% leading up to the figures presentation on 23 August.

Nvidia is a growth company, and its shares are priced accordingly. However, some market players pointed out that the jump in share price after the Q1 report was smaller than the company's actual upward adjustment of guidance. With such a view, the share could thus be said to be "cheaper" versus its future prospects even if the price rose.

Prior to the second quarter figures, however, expectations had been turned up considerably. The general view seemed to be that the underlying development had continued, and that the company was again in a position to surprise positively. They did this too. Both turnover and profit came in higher than the analysts' expectations, and the guidance going forward was again raised. CEO Jensen Huang also repeated almost verbatim his previous statement, and further specified that "The race is on to adopt generative AI". The company also announced a sharp increase in the buyback program for its own shares.

Although the strong development continued for the company, this time the analysts were more prepared. Before the stock exchange opened the next day, there was praise for the strong figures, and an avalanche of brokerage houses upgraded their price targets. The size of most of the upgrades was still much smaller than after the previous quarter's numbers. Virtually everyone agreed, however, that the share should go up, and had considerable potential going forward.

This is also how it looked to go right away. The shares were traded all the way up to 520 in aftermarket trading, 10% up from the price at the close of ordinary trading on the same day. The positive sentiment spread to other stocks, and futures on the NASDAQ 100 traded up over 1% after closing strongly the previous day as well.

Towards the opening of ordinary trading on Thursday, however, the price advance moderated. After trading as high as $520 in after-hours trading, Nvidia opened at 502.16 at the bell in New York. Still a nice rise from the previous day's closing of approx. 471. Most interesting was the further development from there. The stock began to fall, and ended the trading day almost unchanged from before the quarterly numbers were released. Admittedly, this happened on a day when the entire NASDAQ had a very strong reversal down from a high opening. While the index rose somewhat the following Friday, Nvidia continued down, touching a low of USD 450, nearly 4.5% lower than before the publication of strong Q2 and its upward revision of guidance.

This is interesting stuff for a trader. Good news were sold, and the shares showed an opposite movement than expected. Nvidia still has one of the strongest technical charts in the semiconductor sector. At the time of writing, it has remained above both the 8, 20 and 50 day moving averages, and has technical support from the earlier consolidation around 450. Nevertheless, the cold shower from the number release is worth noting. Although the company has a unique position and has shown fantastic growth up to this point, it is also a fact that a significant continuation of this growth has been priced into the share price as it is now. From what I can see, Nvidia has a P/E of approx. 111 times the last 12 months earnings. Frothy, but earnings growth has also been strong. What the P/E multiples are going forward depends on which estimates are used. I see numbers on the order of 42 from some sources. Maybe not unattainable and maybe not expensive. But then the company must manage to deliver continued growth and continued record margins in an industry that is very exposed to competition.

Right now, Nvidia is the "king of the hill" in microchips. Perhaps they will be able to continue with it, but the price reaction after the numbers shows that it is in any case possible to raise the question: Did Nvidia just print the top in microchips?