With sales up 122% and profits soaring 168% year-on-year, it's hard to call Nvidia's Q2 results disappointing. However, given the company’s history of surpassing even the most optimistic expectations, the nearly 7% after-hours drop in its share price is perhaps understandable.
A 3,000% increase in five years
The leading provider of AI infrastructure, Nvidia is now valued at over $3tn, making it the world's third-largest company. Its stock has surged 3,000% in the past five years, with its revenue surging from under $10bn to $60bn, but it's uncertain how long this success can continue. As expectations rise, meeting them may become increasingly difficult. The flash crash three weeks ago highlighted how quickly nervous investors can trigger a sell-off.
Nvidia’s market influence
As the primary supplier of powerful chips crucial for AI tools, Nvidia's revenue and margins have increased sharply, driven by its technological edge over competitors like Intel and the ability to sell its chips at premium prices.
Nvidia's competition never sleeps
Nvidia's customers include Amazon, Alphabet, and Microsoft, companies that provide the backbone for AI infrastructure and currently drive most of Nvidia's revenue. However, all three are investing in AI chip development, and competitors like Intel also want a piece of the pie. While Nvidia continues to deliver strong results, increasing competition could slow its impressive sales and profit growth.
Pricing power is in danger
Nvidia's dynamic growth has been fuelled by rising profit margins, which have soared from around 15% to nearly 60%, something most companies can only dream of. Minimal competition in high-powered AI chips has given Nvidia strong pricing power, creating an ideal scenario of increasing sales and high margins for shareholders.
However, this could change if competition intensifies. As more competitors enter the market, the supply of AI chips could rise, leading to lower prices. This could slow revenue growth and shrink profit margins, reducing Nvidia's profitability.
The upward trend of Nvidia shares is intact
For now, Nvidia's stock continues to trend upward, with the potential to become the first four trillion-dollar company. The August low of around $90 is a key support level in this uptrend. If this level is undercut in the coming weeks, it could signal a longer downward phase, reflecting the cyclical nature of the chip industry
Find your flow: four principles for trading in the zone
Learn about the four trading principles of preparation, psychology, strategy, and intuition, and gain key trading insights from some of the world's top investors.
Get this free report
Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.
