Transcription
Let's get ready for NVIDIA earnings. This is a big deal, and it could move the entire stock market. We could be at the beginning of S&P 500 7,000 or 4,500. In other words, things could be moving pretty quick after this one.
But let's talk about what market expectations are and what could end up happening with the stock. Given that after AMD and Arm both guided 80 and 60 basis point misses—that’s very small, less than 1% of a miss—and their stocks fell 8 to 10%, NVIDIA, which almost seems like it’s the prop holding up the entire stock market, is a pretty big deal, especially since NVIDIA makes up 6% of the entire US stock market. Think about that for a moment: one company makes up 6%. If you had 16 NVIDIAs, it would represent all of the stock market capitalization of the entire United States. Pretty crazy.
Anyway, what you want to look for here is very different than what you’re going to see at something like a Walmart or a Target, right? These are companies that are trying to figure out how do we get more consumers spending on things that they have to spend money on. You’re really appealing to what is the lower to middle class having to spend their money on. Target this morning is down 18% because they warned of flat sales—a flat sales quarter, so no growth—in inventory buildup. It’s buildup that they built because of the port strikes.
That’s actually something that, in my opinion, made the economy seem stronger than it really was in September because companies were pre-ordering, expecting we could have a prolonged port strike going into one of the most critical holiday shopping periods, especially now when the economy is slowing. That’s what makes it so critical.
As a result of that, Target’s down 18% because they built up on inventory, and they couldn’t really spend it. The port strike didn’t really last that long, so oopsy-daisy. Walmart did well; that’s fine. But we got to focus on NVIDIA because NVIDIA doesn’t focus on that lower-income segment. NVIDIA focuses on the highest of high. They are basically selling the white glove service to the rich billionaires of the world—the Michael Saylor types who, when you go to their house, have a menu, and then you look and go, “Hmm, what should I get?” They look at you and say, “Son, get everything. One of everything, it’s okay!”
Yes, that’s what NVIDIA is doing. They are selling to the richest of the rich, and that is what gives them large, massive pricing power. They sell to the Metas, the Amazons, the Teslas, the Xais—companies with massive cash flow to blow on the best edge they can get in artificial intelligence.
When we look at what the estimates are today, markets do think NVIDIA is going to keep growing. NVIDIA guided that their revenue would grow to about $28 billion this Q2. Last year’s Q1. It’s a little confusing, given that we’re in November. It’s like, “Oh, we’re about to get Q2 earnings.” This is confusing. Yes, here’s the easiest way to understand what expectations are for NVIDIA: NVIDIA guided for $24 billion of revenue in the first quarter. They guided that when they reported their fourth-quarter earnings, right?
Okay, they ended up beating that guidance by 8.3%, and they were already expecting to grow. So they guide a number that already shows good growth, and then they beat it. This is the under-promise, over-deliver that NVIDIA pulls off. Right now, they're guiding us to a 7.1% Q2 expectation, but markets are like, “Nah, nah, nah.” We know you’re going to under-promise, over-deliver again. We think you’re going to beat with 15% quarter-over-quarter growth. That’s pretty remarkable, especially considering this:
In the next four years, NVIDIA is expected to grow EPS, this is per Wall Street, by only 25% per year on average, which, just to make math simple, if we do 25 divided by 4—you know there’s some compounding in there—but that’s probably about 6% quarter-on-quarter growth, sequential, right? Quarter to the next quarter to the next quarter. Well, right now, markets are expecting NVIDIA is going to be at 15%, which is two and half times what people think their sort of terminal growth rate is going to be.
Obviously, if NVIDIA misses here, it’d be pretty bad. The implied volatility is close to 8%, so if you’re at 147 and you take off 8%, honestly, you only go down to like 135. This is unless obviously there’s a big miss and you have some kind of 20% decline. You know 147 times 8, you’re still only at 117, right? They were at like $100 in August during the Japanese crisis, you know, and the recession could still come.
It just seems like, you know, thanks to port strikes or otherwise, it keeps getting delayed. Who knows? Maybe it’ll get delayed forever. In recessionary environments, almost all stocks sell off, so, you know, everything we’re talking about here is absent a recession.
Now, what’s fascinating is EPS growth of 25% per year is pretty good, but it actually makes their valuation pretty reasonable. Consider this: NVIDIA’s valuation sits at about a two PEG at this level—2.01 PEG. That’s a 51.4 PE ratio divided by 25.57% expected growth of EPS over the next four years gives you a TWEG. If you think growth is going to falter, you probably don’t want to invest in this due to the expectation that NVIDIA is always going to beat and raise guidance. If you think they can maintain these expectations and just keep it going, then NVIDIA could have a reasonable valuation at a 2.67 PEG today, which would actually put the stock at $196, up about 34-33% from where it is now.
But it all comes down to growth on this one, and there are going to be a lot of questions about, “Kevin, what about Blackwell?” We had a Blackwell delay that got fixed, but now we have concerns and rumors over Blackwell chips overheating. And this is true; there are overheating issues. But this is not so much an NVIDIA issue. Think of NVIDIA as the developer, the designer of like a housing track, the neighborhood. You know, they got the Monopoly mustache, and they’re like, “Oh yes, design the house like this, oh yes, build it like this.”
And then Dell and Supermicro come in, "All right, we’ll get to swinging the hammer." They’re like the contractors; they’re going to do the work. You know, Vertiv is going to put in the plumbing for you, the water cooling plumbing. Dell and Supermicro, they put in the foundations and the framing, and they'll do the grunt work. NVIDIA is collecting the big fat margin; these other guys are collecting very, very little margin.
But if there’s an overheating issue, it’s really the problem of Dell, Supermicro, and Vertiv—not so much NVIDIA. So I think NVIDIA will beat and raise, and then what they’ll do is they’ll shout out Supermicro especially, but probably also Vertiv, and they say, “Hey, these guys already have solutions cooking for any kind of heating issues and cooling issues. This is solvable. In fact, it just shows how powerful and great Blackwell is. This is an AI revolution, a new industrial revolution, and we have the best machine that exists. They are revising their infrastructure, and they’re going to help us crush it. It’s not us; it’s them. But don’t worry, they’re going to fix it.”
Then you might actually see a big pump on especially Supermicro because I kind of think it’s pretty undervalued right now, and I think the accounting issue is overblown. I could be wrong, obviously.
So for me, I look at Supermicro as a potential huge beneficiary here, but I also look at my two-by-two foundation for NVIDIA and I say reasonable valuation as long as growth doesn’t disappoint. You know, frankly, with the TWEG, even if I write down their growth, you know, probably let’s see—2.67 to 2/2.67. Even if I write down their growth by 25%, so I assume that their growth is only going to be about 19% in EPS per year going forward, it’s still a reasonable valuation where it is today. Is it undervalued in that case? No, it’s fairly valued.
So I don’t see NVIDIA’s valuation as excessive. I actually saw it as a good deal when it was in sort of the lower 100s, and I said they’ve got a good valuation right now. You know, it’s only like a 1.3 or 1.5 PEG. I didn’t personally buy it because I’m still nervous about a recession, but you know, I can still provide you information and have my own biases about recession. I’m very concerned about recession; I don’t know if I’ve made that clear.
But anyway, their pricing power is unquestionable. So on the two-by-two foundation, PP is great. Sentiment is probably somewhat down because of the Blackwell overheating concerns, which are probably overblown. They’re just going to brush those off. The balance sheet is extremely robust at this company; valuation is quite frankly reasonable as long as the AI spend and the revolution keeps going.
And really, I think, I mean, I don’t know, one day they’re going to miss, and people are going to freak out, but at least right now, I don’t know if that’s this quarter. So we’ll see.
This is the last Q1 earnings press release that we have where they talk about AI factories, how they fixed their Blackwell delay, how they increased some of their marketing for Q2, which I think is interesting. Expectations—I just gave you sort of the revised numbers—they're really expecting a big beat here: $30 billion basically on top of the $28 that they’re guiding.
And so, you know, look, this is a company that frankly, it just has a reasonable valuation. At some point, GPT movements, you know, like, what should I say? Oh, the historic VA, by the way, right now it's pretty low; it's as low as it was before the GPT movement.
So you could see a big move in volatility here even though the implied volatility is a little higher than average. But what's remarkable really is that at some point, LLMs will become a commodity, but the question is: will that be offset by training artificial intelligence robots or, you know, drive platforms as more companies try to get into creating their own sort of white-labeled full self-driving platforms, maybe even using the NVIDIA Drive platform? I’m a big fan of Orin and Thor—the NVIDIA Drive platform—and I think that does eat into the moat of Tesla, although that’s not sort of a ubiquitous and understood concept right now. Most people say, “Oh, well, Tesla has all the data.” They can get the data as well; there’s plenty of demand to compete with Tesla and willingness by companies to do that.
So I’m very curious to see what happens here. I don’t suspect that Jensen is going to give us any bad news. If the growth misses, they’ll tank. But again, I think they will continue to forecast strong growth, especially for this new Blackwell chip, and they’ll prop up their friends.
So that’s my expectation. I think you could get this stock to almost $200 with a, you know, before Christmas. If they miss, though, the entire pedestal of the market could collapse, and if you start a market correction that lasts 6 to 12 weeks, I think you guarantee a recession.
So in other words, uh, no pressure, but NVIDIA, you’re the only thing preventing us from a recession right now. So good luck everybody!
Make sure to get the Meet Kevin Alpha report, by the way. I'm about to send the next one. Go to meetkevin.com to sign up and get that free Alpha report every day before the market opens up. Thanks so much. See you soon.
Bye.
Do not advertise these things that you told us here. I feel like nobody else knows about this.
Well, we'll try a little advertising and see how it goes.
Congratulations, man! You have done so much. People love you; people look up to you, Kevin. PA, their financial analyst and YouTuber, Meet Kevin, and always wait to get your take.