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When regular companies report quarterly earnings, investors peruse them, and the shares move up, down or sideways. When those earnings come from Nvidia, however, the financial world tilts on its axis.
The chipmaker’s stock dipped on Wednesday even though it said that revenue and earnings roughly doubled, year on year. The only apparent wrinkle is that its forecast for next quarter’s revenue, at $37.5bn, is barely more than analysts expected, and that earlier in the year, the company was growing even faster. That said, CEO Jensen Huang has outdone his own estimates by about $2bn for the past 6 quarters, including the latest one.
Twitchiness is par for the course, because Nvidia’s fortunes increasingly drive everyone else’s. At $3.6tn, the company is the world’s biggest by market capitalisation, and makes up 7 per cent of the S&P 500 index. Back in 2000 when Cisco briefly became the planet’s most valuable company, its weighting was less than 4 per cent of the S&P. As of Wednesday, Nvidia’s stock accounts for 24 per cent of the index’s gains this year.
The result is that when Nvidia does well, animal spirits rise across the market. Bank of America analysts had calculated this week that investors were expecting a 1 per cent index move in response to Nvidia’s earnings — greater than the shift they expect from US inflation data later this month. The interconnectedness is real: as Huang quipped on Wednesday, “almost every company in the world seems to be involved in our supply chain”.
In the short term, Nvidia has the enviable benefits of both scale and scarcity. Supply constraints keep prices high, and the company says demand for its new Blackwell chips will exceed its expectations of “several billion dollars” in the current quarter. Meanwhile, governments from Saudi Arabia to Denmark are seeking to build their own state-backed artificial intelligence initiatives, so while Silicon Valley depends on Nvidia, the reverse is becoming less true. That suggests the virtuous circle can continue.
Whether that justifies a valuation of 34 times forward earnings, as calculated by LSEG, is up for grabs. Cisco stock, after a moment on top of the world, plunged during the dotcom crash, and never recovered. While Nvidia’s customers are paying hand over fist for chips driven by the promise of AI, it remains to be seen whether their customers — and their customers’ customers — will pay up for the resulting services too.
Nvidia has two things in its favour. First, its valuation is far behind the 130 times earnings Cisco enjoyed in 2000. Second, Huang has the benefit of hindsight and lavish profitability. Cisco’s earnings were 20 per cent of its sales before the dotcom crash; Nvidia’s are nearly 60 per cent. Spend that wisely, and his company will move the market for some time to come.
john.foley@ft.com
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