NVIDIA's Sneaky Back Door Cover

Email agenda:

Estimated read time: 3 minutes 28 seconds

1. NVIDIA's Sneaky Back Door Cover

Good morning and happy Tuesday - let's get smarter

NVIDIA's Sneaky Back Door Cover

$NVIDIA is a technology company known for designing and manufacturing graphics processing units

Just like other technology companies, they are deep in the AI race and are riding the wave

Nvidia reported earnings last week and the stock went nuclear, jumping from $303 per share to $390.28 in the after hours

As we have discussed previously, earnings are a catalyst that can make an asset move

Something like valuation, where you say this stock based on my analysis is worth $356, is not a catalyst. There is no valuation event than makes the asset move

The most difficult part about earnings, is there are 2 major components that can impact the price

Earnings vs expectations and earnings guidance into the subsequent quarters earnings

Earnings vs expectations is straight forward

How did the company perform for the last quarter vs what were Wall St’s consensus estimates?

Nvidia’s Q1 performance vs expectations:

1. Earnings per share for the quarter came in at $1.09 vs 92 cents estimate (beat expectations)

2. Revenue for the quarter came in at $7.19 billion vs $6.52 billion estimate (beat expectations)

This on its own is a bullish catalyst for the stock

However…

The guidance by CEO Jensen Huang is what really drove the massive move up in NVIDIA’s stock

Nvidia said they expect sales of about $11 billion in Q2’23, which is more than 50% higher than Wall St’s estimate of $7.15 billion

The CEO could not have been more bullish on his commentary of NVIDIA and it’s role in the AI movement

“The computer industry is going through two simultaneous transitions — accelerated computing and generative AI,” said Jensen Huang, founder and CEO of NVIDIA

A trillion dollars of installed global data center infrastructure will transition from general purpose to accelerated computing as companies race to apply generative AI into every product, service and business process.

Our entire data center family of products — H100, Grace CPU, Grace Hopper Superchip, NVLink, Quantum 400 InfiniBand and BlueField-3 DPU — is in production. We are significantly increasing our supply to meet surging demand for them”

But… what happened late on Friday afternoon after this earnings report is what makes me a little squirrely

A little known game played in the public company SEC filings world is always release information that you want less attention around late on a Friday afternoon

Right after extremely bullish guidance by NVIDIA, they put out a stock offering late on Friday of up to $10 billion in shares

Seems a little bit fishy to pump the hell of your earnings guidance, have the stock explode in value, and then issue $10 billion worth of new shares on that new pumped up valuation no?

Some businesses are in the business of selling products, some companies (like Tesla) are in the business of selling stock

NVIDIA is currently trading at a multiple of 37x revenue and 202x it’s earnings

It reminded me of a great quote by the CEO of Sun Microsystems, Scott Mcnealy about crazy valuations

Think of it this way

If you buy a business based on EBITDA, or it’s core-operating cashflows which EBITDA is a proxy for, say 5x

You are assuming that in 5 years that EBITDA assuming it stays the same will be paid back to you

You have a 5 year payback period

Now do you see the insanity in paying 202x earnings for a stock?

Here is the quote from Scott McNealy

The biggest potential issue Nvidia can face outside of macro/GDP slowdown is now having to live up to that earnings guidance

If you are extremely bullish on your next quarters numbers, then Wall Street will up it’s estimates

So what happens now if you don’t hit those estimates?

Look out below

I am very positive on AI and NVIDIA’s industry as a whole

What drives me nuts is the games played

The only person better at pumping up a stock and then selling shares to the public or dumping them on the public is my friend Chamath

At least NVIDIA has a legitimate business and product unlike the shit he sells

- Dev

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.